Subsidies are for the rich not the poor

I agreed with the article Subsidies are for the rich not the poor  and found the same good and copied here.

Income divide is a curse that has gripped many nations across the world. And India is no exception to it. Over the years the rich have gotten richer while the poor seem to be becoming poorer. Therefore the concept of subsidising the daily expenses for the poor, seems to be a sound one. And this is the concept that the government has tried to exploit over the years. The net result, the poor have become poorer still while the rich have become richer. This makes us wonder the rationale of subsidies. All these subsidies seem to have done is to make sure that the companies being forced to sell their products at a discount continue to perform poorly. And the government loses out on tax money from them.

A paper published by the International Monetary Fund (IMF) had concluded that ‘the top 20% of the households in India get six times more benefits from fuel subsidies than the poorest 20%’ . This is because the richer households tend to consume a lot more fuel based products as compared to the poor. This makes sense right? The rich drive more cars, most of which are large SUVs or sedans. These are powered by diesel. And the fuel being subsidized is mostly diesel and kerosene.

In fact the same paper of IMF states that in per capita terms the top 10% of the households spend 20 times as much on fuel as compared to the poorest 10%. And we subsidise fuel for these bottom 10%. This makes no sense to us at least. In essence the fuel subsidy is helping the rich save more. While the benefits to the poor are limited. And think of the burden that these subsidies are placing on our fiscal deficit. As the deficit has worsened over the years, the problems caused in our economy are something we are seeing in the bad macro numbers.

So what is it that the government could do to correct this ridiculously inefficient and inequitable system? For the starters it could speed up on the direct cash transfer system. That would ensure that the right sections of the society benefit from the subsidy system. In the long run this would help bring the subsidy burden down. But the government is not doing much to speed up the direct cash system in the country. Instead it is too busy in its image building exercise for the upcoming elections.