West indian countries

What are grants and why do countries need them?

Ruling in favor of Brazil, Australia and Guatemala, which were embroiled in a dispute with India over its sugar subsidies, the WTO said last month that New Delhi’s domestic support measures for sugar and sugar cane were incompatible with world trade standards.

India has now appealed to the WTO’s Appellate Body, saying the ruling made “erroneous” findings on domestic support programs for sugar cane growers and exports.

Similarly, 28 members of the US Congress have urged the Joe Biden administration to sue India at the WTO over its subsidies to wheat and rice producers. Obviously, these countries want a “level playing field” here. But the United States and other Western countries also funnel subsidies to their farmers.

The WTO authorizes subsidies of up to 5% of the value of production for developed countries and 10% for developing countries. But critics say Western countries have long bent the rules to fund their farmers.

Now, reports suggest that in the next Union budget, the Indian government is likely to earmark Rs 1.4 lakh crore or $18.8 billion for fertilizer subsidy. This is a slight increase from Rs 1.3 lakh crore as fertilizer subsidy in FY 2022, ending in March this year.

The subsidy is intended to compensate fertilizer companies that sell their products to farmers at below-market prices. The increase in the fertilizer subsidy is of course being done in view of the upcoming National Assembly elections in Uttar Pradesh and Punjab.

But what do we mean by subsidies? And how exactly do they work?

In the context of the Union budget, a subsidy is a benefit granted to a particular individual, company, institution or sector. Grants are given to alleviate some sort of monetary burden and are claimed to be in the general public interest.

Subsidies can be either direct, such as cash payments, or indirect, such as tax breaks. The objective is to reduce the market price of a particular product or, as in the case of the fertilizer subsidy, to compensate a particular category of producers for selling their products below market prices.

Another type of subsidy is one given to producers to encourage manufacturing in a particular sector. A recent example is the Production Linked Incentive Scheme or PLI for semiconductor products.

Amid the global shortage of semiconductor chips that has impacted the supply of everything from automobiles to smartphones, the Center has sanctioned Rs 76,000 crore for the PLI program for semiconductor products.

Under this program, the Center will provide financial support or a grant that will reduce the production costs of companies manufacturing semiconductor chips and thus encourage them to set up new factories and other facilities.

As with everything else, there are arguments for and against subsidies. Proponents believe the government can use subsidies to incentivize global companies to “make in India” and turn India into a manufacturing hub that would ultimately create more jobs.

However, critics say the burden of the subsidies falls on taxpayers, who may complain about rising taxes at a time when the economy is not doing so well.

Another group of economists believe that while subsidies may help induce some companies to establish a manufacturing base in India, the long-term sustainability of these operations would depend more on the “ease of doing business” here. If a country can provide a business-friendly business environment, then perhaps the need to expand subsidies will not arise.

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