Price Determined Government: Effect of Taxes and Subsidies on Market Price and Public Distribution System

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Effect of Taxes and Subsidies on Market Price

  • Government imposes tax on goods and services. Taxes such as customs duty, income tax, service tax, and central excise duty are collected on goods and services. These taxes are paid to the government by producers, sellers and importer of these commodities. They will collect those taxes from the final consumer in terms of price.

  • If the taxes levied by government are higher than the prices will be more. Final burden will be on consumers. To protect both the buyers and seller’s government provide tax reductions and subsidies.

  • As per the new tax system in India, government determines different taxes for different commodities. Those tax rates are called slab rates. Those taxes are reviewed time to time and will be adjusted as per requirement.

  • At the same time government is also giving subsidies to the producers. Subsidy is a government incentive in the form of financial aid with the aim of promoting economic and social policy. Subsidy will help producer to produce at low rate, then the price would also be low to the final consumer.

Benefits of tax reductions and subsidies:

  • Encourage more production

  • Promote the exports by producing surplus

  • Reduction of prices for the local people

Public Distribution System

  • India is 2nd most populous country in the world after China. According to the World Bank, more than 21% of Indian population is Below poverty line (BPL). World Bank defined BPL basing on purchasing power parity (PPP). Those who are unable to spent $1.90 per day (as per 2015 report) will fall under BPL. This shows India is having more poor population.

  • Those people who are poor, unable to get their daily needs. They could not buy goods and services at market prices. In order to reduce the poverty in India, government launched many schemes. Public Distribution System is one of the most important schemes.

  • Public Distribution System was started in early 1940s in India. Under this system Government provide essential commodities like wheat, rice, sugar etc. are made available to the common man at cheaper rate through fair price shops called ration shops. These commodities are sold through an identification paper called ‘ration card’.

Essential Elements of Public Distribution System

1. Subsidy: Government gives subsidies on the commodities sold through public distribution system. Therefore, the prices of the commodities sold under this system are relatively lower.

2. Fixed quantity (Rationing): Government will fix the quota per head per unit of time on basis of minimum consumption. Ex: if minimum consumption of rice of a person is 5kg per month, family with 4 people will get 20kgs of rice per month through public distribution system.

3. Fair price shops (FPS): Also known as Ration Shops. Government set these shops all over the country to meet the requirements of the poor people. Government will supply the required goods to each fair price shops on regular basis. Fair price shop holder will take care of distribution of goods as per government orders, for that he will get commission as remuneration.

How Public Distribution System Works

Image of State Goverment

Image of State Goverment

CIP – Central Issue Price

MSP – Minimum Support Price

FCI – Food Corporation of India

Benefits of PDS

  • Set a standard price reasonable for both suppliers and buyers

  • Income to farmers

  • Transfer of Surplus goods to Deficit areas

Challenges in PDS

  • Criticism of low quality

  • Storing is difficult

  • Diversion of goods to open market

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