Negative Consequences of Inefficient Subsidies: A World Bank Report

Context:

The World Bank has released a report emphasizing the detrimental effects of inefficient subsidies in the agriculture, fishing, and fossil fuel sectors.

• The report reveals that the combined subsidies in these sectors surpass USD 7 trillion, which is approximately 8% of the global gross domestic product.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Negative Consequences of Inefficient Subsidies: Major Report Highlights
2. Positive Impacts of Subsidies in Various Sectors
3. Challenges Related to Subsidies

Negative Consequences of Inefficient Subsidies: Major Report Highlights

Fossil Fuel Subsidies:

• Price reduction measures for polluting fuels have limited effectiveness, as energy demand remains unresponsive to price changes.
• In 2021, countries spent USD 577 billion on subsidies aimed at lowering the prices of polluting fuels like oil, gas, and coal.
• Such subsidies encourage the overuse of fossil fuels and contribute to air pollution, particularly in middle-income countries experiencing industrialization and high health burdens.
• Subsidies for fossil fuel consumption exceed commitments made under the 2015 Paris Agreement, with countries spending six times more on these subsidies.

Agricultural Subsidies:

• Explicit subsidies in the agricultural sector amount to around USD 635 billion annually in countries with accessible data, and global estimates surpass USD 1 trillion.
• These subsidies target farmers for specific inputs or cultivation of certain crops.
• Research indicates that subsidies often favor wealthier farmers, even when intended to target the poor.
• Inefficient subsidy usage has led to up to 17% of nitrogen pollution in water over the past three decades, resulting in health impacts and reducing labor productivity by up to 3.5%.

Fisheries Subsidies:

• The fisheries sector receives approximately USD 35.4 billion in subsidies annually, of which around USD 22.2 billion contributes to overfishing.
• Subsidies play a significant role in driving excess fishing capacity, depleting fish stocks, and reducing fishing rents.
• In the absence of sustainable management, subsidies exacerbate the negative impacts on already depleted fish stocks.
• Redirecting subsidies without incentivizing increased fishing capacity is crucial for protecting remaining fish stocks.

Positive Impacts of Subsidies in Various Sectors

Agriculture:

• Income Support: Subsidies provide income support to farmers, helping them cope with price fluctuations, market uncertainties, and production risks. For example, the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme in India provides direct income support to small and marginal farmers.
• Increased Agricultural Production: Subsidies on inputs like fertilizers, seeds, and irrigation promote increased agricultural production. The Nutrient-Based Subsidy (NBS) scheme in India ensures the availability of affordable fertilizers to farmers.

Fishery:

• Modernization and Infrastructure Development: Subsidies in the fishery sector aid in the modernization of fishing practices and the development of infrastructure, leading to increased productivity, improved safety measures, and better storage facilities. The Pradhan Mantri Matsya Sampada Yojana (PMMSY) in India focuses on infrastructure development to enhance fish production and fishermen’s welfare.
• Livelihood Support: Subsidies provide livelihood support to fishermen, particularly during lean seasons and adverse climatic conditions. Schemes like the National Scheme of Welfare of Fishermen assist with the construction and repair of boats, supply of safety equipment, and training programs.

Fossil Fuel:

• Energy Access and Affordability: Subsidies on fossil fuels such as LPG (liquefied petroleum gas) and kerosene ensure energy access and affordability for vulnerable sections of society. The Pradhan Mantri Ujjwala Yojana (PMUY) in India aims to increase LPG usage and reduce air pollution, deforestation, and health disorders.

Challenges Related to Subsidies

• Fiscal Burden: Subsidies often impose a significant fiscal burden on the government, straining its finances and impacting the allocation of resources to other critical sectors like healthcare, education, and infrastructure development.
• Fiscal Sustainability: Balancing the need for subsidies with fiscal sustainability is a constant challenge. Governments must ensure that subsidy programs are financially viable in the long term.
• Effective Targeting: Ensuring subsidies reach the intended beneficiaries effectively is a challenge. There is a risk of subsidies being misdirected or captured by ineligible individuals or entities. Proper identification and targeting mechanisms are essential to avoid leakages and ensure that subsidies benefit the intended recipients.
• Market Distortions: Subsidies can distort market dynamics and create inefficiencies. They may lead to overproduction or overconsumption of certain commodities, resulting in market imbalances and price distortions. This can affect the competitiveness of the sector and hinder its sustainable development.
• Transition to Sustainable Energy: Subsidies on fossil fuels can discourage the transition to cleaner and more sustainable energy sources. They can perpetuate reliance on fossil fuels, contributing to environmental degradation, air pollution, and climate change.

-Source: Down To Earth