The World Bank has recently published a report that underlines the negative effects of inefficient subsidies on agriculture, fishing, and fossil fuel sectors. The report reflects upon the repercussions caused by both implicit and explicit subsidies in these sectors, including climate change aggravation due to overspending of trillions of dollars. The total calculation from the report shows that subsidy in each of these domains exceeded USD 7 trillion or about 8% of the global gross domestic product (GDP).
Primary Observations of the Report
The World Bank report brings into light various concerns related to the rational utilization of subsidies. It highlights issues such as the impact of fossil fuel subsidies on climate change, the inadequacy of agricultural subsidies, and the damaging effects on the fisheries sector caused by improper subsidy distribution.
Fossil Fuel Subsidies and Climate Change
The report notes that efforts towards reducing incentives for polluting fuels have only met limited success because energy demand is less responsive to price changes. In 2021, it was found that countries spent USD 577 billion on subsidies intended to lower prices of fossil fuels like gas, oil, and coal. Funding such initiatives inadvertently promotes overuse of these fuels, leading to increased air pollution – a significant health threat in industrializing middle-income countries.
Implications of Inefficient Agricultural Subscriptions
In transparent countries, the explicit subsidies in agriculture sector amount to about USD 635 billion annually, with global estimates exceeding USD 1 trillion. These subsidies usually target farmers to encourage them to buy certain inputs or grow specific crops. However, the report states that these programs, even when designed with the intention to assist the poor, end up favoring the wealthier farmers.
Adverse Effects of Subsidies in Fisheries
It’s estimated that the fisheries sector receives around USD 35.4 billion per year in subsidies, of which around USD 22.2 billion contributes to overfishing. These subsidies drive excess fishing capacity, leading to depletion of fish stocks and reducing fishing rents.
Positive Impacts of Subsidies
Despite their drawbacks, subsidies have some positive impacts as well. For instance, they can provide income support to farmers, facilitating increased agricultural production, modernization of fishing practices, development of infrastructure and even livelihood support to fishermen.
Challenges Concerning Subsidies
Subsidies often pose a significant fiscal burden on the government, straining finances and affecting its ability to allocate resources to other crucial sectors. There is also a risk of subsidies being misdirected or captured by ineligible individuals or entities. Besides, these subsidies cause market distortions and environmental degradation.
The Road Ahead
Going forward, it’s important to implement targeted subsidy reforms to ensure their effective distribution. A gradual reduction and rationalization of subsidies can help maintain fiscal sustainability and minimize market distortions, while promoting sustainable practices in agriculture, fishery, and energy sectors.
UPSC Civil Services Examination Previous Year Questions
In the past, questions related to subsidies have appeared in UPSC Civil Services Examination. Here are a few of them for reference:
1. How do subsidies affect cropping patterns, crop diversity, and farmers’ economy? What is the significance of crop insurance, minimum support price, and food processing for small and marginal farmers? (2017)
2. How could replacing price subsidy with Direct Benefit Transfer (DBT) change the scenario of subsidies in India? Discuss (2015)
3. What are the different types of agricultural subsidies given to farmers at the national and state levels? Critically analyze the agricultural subsidy regime with reference to the distortions it creates. (2013)
