Subsidies and its Impact on Economy
9:08:00 PM Posted by Devesh Prabhu
It all started with the government trying to win the votes of the farmers and promised them subsidies and write-off on their loans from the banks. This led to huge amounts of money being written off as bad loans and the money accumulated to such enormous amounts that most government banks had their market share and shares go below their actual value due to the debt that they incurred.
When any company or even anybody that has more debt than they are generating income, for the next succeeding years it is always hard for them to balance their balance sheets. The thing is you’re trying to match the positives and the negatives of balance sheet. You can technically write this off, but on the actual books, you are in the red. Once you are in the red, it now becomes the race to equal it off or come back into the black or positive side of the balance sheet.
Suppose I have a book that is worth 10, but I’m giving it to you for 8. If my manufacturing or production cost is less than 8, then whatever I’m making will be gross profit and after forgoing my costs and other expenses it will be my net income/profit. Until the cost that I’m providing it to you does not go below my manufacturing or production cost, I will still make a profit but at a lower amount.
The thing is I will have less money to spend on my development, research and development, expansion plans, salaries, my own lifestyle. Now when I have less to spend on me and my family, it will mean that I am not infusing that particular amount of money into the local market to buy other products either for my office or for my home.
As it is truly said, “one man’s expenditure is another man’s income.” Either I as a manufacturer need to improve upon the way I am making things or I have to increase the cost and sell the product at 10 itself. If my product is an FMCG or daily use product, it will sell, else I will have less sales.
The thing with freebies is that it should be a win-win situation for both the customer as well as the manufacturer (read as people and government). Giving subsidies is not all that bad in most cases, but there should be a clear segregation on how it is implemented. There need to be clear checks and balances on how it is being done and whom it is reaching.
You may go in for a situation where you pan out the repayment of the loan or amount over an increased number of years and also across many generations in family itself, like from grandfather to father to son. If you know that the person to whom were providing the loan (in the case of a farmer) is going to hit by a hurricane or adverse rain, the bank showed lower the monthly installments or repayment options.