Subsidies are for the rich not the poor - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Subsidies are for the rich not the poor 

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In this issue:
» Gold falls but retail buyers are still not buying
» The biggest indicator of gloom in India's economy
» Jump in derivative trading
» De-risking revisited by Nouriel Roubini
» and more....

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.

Do you think the subsidies in India are really helping the poor? Please share your comments or post them on our Facebook page / Google+ page

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01:00  Chart of the day
Since the second half of last year, gold prices have pretty much been headed in one direction. That is down. As shown in the chart gold prices have declined by nearly 39% from its peak in 2011. As a result most of the world's serious buyers seem to be accumulating gold in the form of bars, coins, etc. But the biggest gold consuming nations of India and China are not seeing much buying interest at least on the retail side. Most of the retail buyers in these two countries seem to be holding off on their gold purchases despite the severe correction. One reason for this is that buyers are cautious of the declining prices. They just do not know when the prices would stop falling. As a result they seem to prefer to defer their gold purchase. This has led prices to tumble even further. Keeping in mind the troubles in the developed world we feel that not buying gold makes no sense. With the debt troubles in Europe and slowdown in US, disaster will hit global markets sooner than later. During such times having some gold in one's portfolio would act like an insurance policy.

Source: Kitco

India's economy is slowing. But the real worry for the country is the reduction in the savings rate. Slowing growth and stubborn inflation have begun eating into the net financial savings of the country. The savings rate sharply fell to 30.8% in 2011-12 from 36.8% in 2007-08. The effect of inflation continues to be one of the biggest concerns for savers and investors alike, eating into people's savings faster than it grows. The main reason is that interest rates are much lower than inflation rate. So it does not make sense to save in bank deposits. If someone really wants to save money, they will save in gold or silver. Also, when interest rates are lower than inflation, it makes sense to borrow heavily. So most Indians are in debt. The government also encourages debt with its tax rules. So even if an Indian can pay for real-estate or car, they will take a loan for the same. India's growth spurt is driven by high domestic savings rates, growing domestic demand and consumption and a globalised economy. Thus a reduction in savings poses a major threat to the economic recovery of the country.

Global financial markets have been going topsy-turvy. There is the possibility of a pullback of the QE by the US Fed. China's economy is slowing down. Europe is still in a mess. And India has been facing challenges on several fronts including high inflation, twin deficits, slowing growth, etc. All these factors have led to wide swings across asset classes such as stocks, currencies and commodities. This has resulted in a large number of retail investors exiting the stock markets in India. While extreme volatility and uncertainty tends to make long term investors nervous, traders and speculators tend to thrive on it. It is no wonder that derivate segments seem to be buzzing with activity.

An article in the Business Line provides some interesting statistics. In the last three months, the equity derivates segment on the NSE witnessed a 27% YoY increase in the average monthly turnover. In fact, the monthly turnover is the highest since 2010. The currency futures segment on the NSE has also witnessed a sharp rise in activity. During the April-June quarter, the monthly turnover in this segment shot up by over 32 times YoY. Gold future contracts on the MCX also witnessed a 12% YoY rise in turnover.

Economic policy making is no longer about judging to what extent the domestic inflation and industrial growth will impact GDP. Economic de-risking is about taking calculated guesses, if you will, at a number of scenarios. This includes taking hints from other governments and central banks. The US, Eurozone and Japan in particular have had tell tale effects on global economy for last two years. The Chinese slowdown too has taken a toll on commodity prices. Economies that were complaining about too much hot money from FIIs are suddenly witnessing flight of capital. Ones like India that are not positioned well to let go of limited forex are now on the edge fearing the withdrawal of the US Fed's QE. If nothing this will suddenly make the currency scenario worse for these economies. A further slowdown in China and other emerging economies is another risk to financial markets. Thus the period of uncertainly that we are witnessing now is not something we have not seen before. Things are not similar to what they were post 2008 crisis. Hence as Nouriel Roubini suggests, in an article published by Mint, economic policy makers will have to revisit their de-risking policies!

A lot seems to be going wrong for the Indian economy these days. With issues like twin deficits, slowing growth and inflation, one may wonder if there is any ray of hope in the near future. As per Economic Times' columnist Mr Aiyyar, there is a big positive change waiting to work in the favor of growth of the economy. The factor that he is counting on here is the increase in working population in the times to come.

India has always prided itself on a higher of share of youth. But if one takes a look at the employment data, the positive does not seem to be captured. The ratio of workers in the population stands at a mere 40%. However, as per Mr Aiyyar, this is likely to be change for the better in the future. His optimism stems from the high share of youngsters that are going through a preparation phase to contribute to the economy later by opting for higher studies now.

While all this sounds very good, the real scenario paints a different picture. While the statistics show that just 40% of population is working and suggests a huge growth potential, the fact is that there is a huge section of the educated youth that is struggling for jobs. Before we can tap the potential of the youth, there are some serious issues that we need to address. First, the quality of education which does little to make the youth employable or to add skills. Forget high education, the country doesn't have enough infrastructure to ensure basic education or even nutrition for youth. The problem is not due to lack of work force, but the supply of jobs. With high technology, this is likely to get worse as the need for human capital will be limited. To capitalize on this resource, we need a sound infrastructure in place and an overhaul in the education system. Otherwise, it won't be long before India's much hyped demographic dividend becomes a liability.

In the meanwhile after opening the day on a firm note, Indian equity markets continued to trade in the positive territory. At the time of writing, the Sensex was up by about 72 points (0.4%). Other Asian stock markets delivered a mixed performance with markets in Hong Kong and Japan trading in the green while those in Indonesia and China were trading in the red.

04:55  Today's investing mantra
"It is impossible to produce superior performance unless you do something different from the majority."- John Templeton
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9 Responses to "Subsidies are for the rich not the poor"


Jul 26, 2014

I am sure this includes the subsidy doled out by the the tune of around Rs 19 crores every year to provide subsidized food to the members of the parliament at the parliament canteen.Do our mps require this at subsidized rates from tax payers"s money.


Sriram V

Jan 2, 2014

This is all like who will bell the cat. Who will remove subsidies, government...? It is not just subsidies. There are many such issues that are affecting us. Ultimately government is formed by more than one party as no one single party is capable of winning the confidence of majority of people in India. The parties spend amount on campaigning for election and publicity to win. Once government is formed that is where corruption starts. They want such kind of subsidies and scams to be in place may be intentionally or influentially. Of course I don’t blame all politicians. It will be a big list of supporting groups, financers, industries, traders, etc. as well who support or influence them. Also they form hardly 1% approx., or may be even less, of our whole India who have major influence.

For a government to form, political party has to show majority. The major party makes deal with small parties and independents to form government. Post forming the government to fulfill these deals and fulfill their own wishes they need such subsidies and scams, also to avoid non-confidence motion.

I do understand pointing out is simple and making a shift or change is difficult. These cannot be changed overnight but some change needs to be initiated which can transform the situation. Statistics say, only 40% approx., or even less, among us, who are educated, literates who understand these things vote to form government. 60% or even more, of us are just ignore saying what is the use of voting? Anyway government will not do any good for us.

My opinion is everyone should come forward, vote and question the government anything that is not going as expected. Questioning government doesn't mean to question Prime Minister or Chief Minister. Question the politicians or authorities or anyone for that matter who are responsible in your territory. Even the people and organizations that are suppose to do good for poor. At least even if nothing moves, we can question about their efforts to progress further. Out of thousand issues, initially one might move ahead in right direction. Slowly one will become two, then five, then fifty, then hundred and so on… Don’t you think we all are responsible for this transformation...?


sudhir adhikari

Jul 14, 2013

Subsidies are not for the poor. It is only for the rich. In general there is a feeling the the poor are more honest
compared to the rich. Presently those materialistically rich are those who are not so rich humanly. Subsidies are just another way of exploiting situation and filling their pockets in place of those for whom they are shown to be.



Jul 2, 2013

I think it is not fair to say that subsidized diesel is being used by rich people, so they are the one getting most benefit out of it. But we need to see that the same subsidized diesel is being used by trucks to transport goods, by trains and by buses. Poor and middle class are the beneficiaries of this.

Another point - it is not fair to compare A rich household and A poor household and compare their diesel consumption. In a country like India how many rich households (who dives diesel guzzling SUVs) are there and how many poor (and middle class) households are there? And if you see the total consumption of diesel by all rich households (directly and indirectly) is much much less than the that of poor households.

Even in a country like USA, most people use gasoline (subsidized or not) and diesel is mainly used by trucks and farmers, yet income gap is growing. I'm highly skeptical of this notion that subsidized diesel is the or one of the reason for income gap.



Jul 1, 2013

There should be high level of taxes for SUVs and vehicles that consume lot of petrol.


Shamal Parab

Jul 1, 2013

I was always against subsidies as it does not reach to the poor but it goes into middlemen's pockets including politicians. Such large subsidy needs transparency. Also, most of the poor community is illiterate and does not have access to information. Govt. has to enrol the poor section on database which should be accessible to every citizen of the country. A special card should be given to every poor citizen for special subsidy on certain essentials. This card can be renewed every two years to update the status.


Amit Sengupta

Jul 1, 2013

No- subsidies don't help. It has created so many poor people that the Government is considering a food security bill- a permanent conduit to siphon money out. Who pays? The rich as well as the poor- the poor pays more in percentage terms to their earnings+subsidies. They get poorer. And randum corruption is creating a class of neo-rich armed not with knowledge but with only muscle power.


Rajesh Dave

Jul 1, 2013

I think the thinking is traditional. The subsidies in the first place are being given from the tax collected from rich. So even if the rich are benefited, it is their own money. In our country, where there is no social security to fall back on, whatever subsidy is offered to either rich or poor is net saving for the rich which a rich person can use during his old age or whenever he is invalid.
The entire scenario can change if the idea of subsidy to any one is taken away and all are taxed in some way or the other. We have a system where if you work hard to earn decent money you are taxed more, but the so called poor, will not pay any tax directly, with the result there is no responsibility towards nation building.


V S Gurumani

Jul 1, 2013

There will never be an end to this debate. We thought direct cash transfer was a solution, but now it appears that there may be big scams brewing in that area as well: pl talk to ordinary gas consumers about how records are being manipulated to show deliveries that did not happen to siphon off the subsidy amount. No doubt there will be a massive CAG report on this, but five years from now, by when a whole lot of politicians and intermediaries would have become richer by crores of rupees and the government will never know who got the money! The only sensible thing to do is to send a very strong signal that the GAME IS OVER. How? Announce a financial ceiling on the total subsidy amount, which will reduce every year by, say 20% and come down to a quarter of where it is in three years. That will set the cat among the pigeons and everyone will scramble to become more efficient and innovative. Will anybody do it? Do you know?

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