💎Subsidies: USA, China & India (29 May 2022)


It’s raining subsidies all around the world. Let’s look at how the USA, China & India are faring with it.

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Chinese companies enjoy an edge over their peers in the global markets due to the cheaper products that they manufacture and then export around the globe. How are they able to do it? Primarily, because of the government aid that they receive.

The government aid or subsidies take the form of free or low-cost loans; cheap raw materials, energy, land, support for R&D, and technology acquisitions. Since 2001, when China joined the World Trade Organisation, subsidies have annually financed over 20% of the expansion of the country’s manufacturing capacity.

Comparing the numbers

The study published by the center for Strategic and International Studies finds that China’s backing of its companies amounted to at least 1.7% of its GDP.

China’s spending on subsidies, both as a share of GDP and in dollar terms, is significantly higher than that of other economies analysed in the report. By comparison, the U.S. spent 0.4%, while South Korea, the No. 2 spender, devoted 0.7% of its GDP.

How do subsidies help the industries?

  • $33 billion in subsidies from 2002 to 2009 helped China triple its paper production and overtake the U.S. to become the world’s largest paper producer

  • In 2000, China was a net importer of steel with 13% of world imports. Today, China produces half the world’s steel and it sells for 25% less than the USA’s prices

  • Since 2008, through subsidies, the manufacturing capacity of China’s solar-panel industry has grown tenfold, leading to a global oversupply and in turn lowering the world prices by 75%

Our take

China's latest subsidies initiatives have been focusing on innovative industries such as electric vehicles and artificial intelligence and this is negatively impacting the companies in the other countries.

The WTO Agreement, which is currently the only global guideline governing subsidies, does not appropriately address the unfair policies of China. And therefore, countries like Japan, European Union, and the USA have been working on creating international governace of their own.

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The USA government has been helping certain industries such as electric cars, solar panels, and technology with subsidies for decades now.

In the big picture, the government supports green energy companies like Tesla, to promote widespread adoption and slash carbon emissions. With subsidies to tech players like Google and Amazon, the government's expectations are directed towards job creation with lucrative salaries for the public.

Cost of subsidies

While giving subsidies to these companies, the government is making use of the taxpayer's money and also taking away from the budget for infrastructure spending, say schools, and roads.

Now the point is how much of it is actually paying back in terms of generating employment or making green energy reach the masses.

But are they really helping?

  • Last year, local governments in Nevada, USA lost more than $105 million to subsidy programs. Nevada is home to Tesla’s “Gigafactory”, which received the largest such subsidy the state has ever awarded

  • Tesla has been rolling out cars in the luxury segment, which are not affordable by the middle-income groups, hence beating the objective of electric vehicle adoption

  • Big tech players have not been able to create sufficient jobs or jobs with a six-digit lucrative pay so as to generate meaningful employment

Our take

Companies like Tesla continue to report losses, even after a decade in business. While the investors in the company have been enjoying most of the financial upside of the government support, the taxpayers bear the costs.

An important question is, how to make these companies accountable for the purpose for which they have been provided the government aid. And also to keep time in check, as to when they will become self-sufficient and move away from the subsidies.

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Last week, the Finance Minister, Nirmala Sitharaman, announced tax subsidies of Rs. 7-9 on fuel prices. This comes at a time when fuel prices were at record highs due to the ongoing Russia-Ukraine war and the weakening of the Indian rupee.

When viewed in terms of the purchasing power of the domestic currency, due to the falling rupee against dollar, India’s price per litre of petrol is the 3rd highest in the world, whereas, for diesel, it's 8th most costly country.

The problem areas

India’s fuel demand soared by 4% to a 3-year high in March as fuel consumption rose above pre-pandemic levels. But India does not have enough reserves, and new oil fields have not been explored. Hence more than 85% of the fuel is imported. The main oil suppliers for India are Iraq, Saudi Arabia, and the USA.

Although Russia is the 3rd largest producer of oil, many countries banned imports from the country post the sanctions after the war. India managed to get the discounted Russian oil but that was barely 2% of the overall imports.

Breaking down the oil price

  • The imported oil forms around 55-60% of the total fuel cost. The Russia-Ukraine war resulted in the rise of the base price from $81 per barrel in November to $108 today

  • Central & State taxes on oil sales form 35%-40% of the government revenues. The Centre recently announced a tax subsidy and additionally some states also curtailed the VAT, taking down the prices by Rs.7-9 per litre

Our take

The tax subsidy will lead to a revenue loss of Rs. 1 lac crore per year to the government, which it will make up for by borrowing from the markets. And this big a number will certainly have an impact on the government budgets too.

For an immediate action plan, India can import oil from countries like Iran and Venezuela with cheaper prices. And the long term focus should be to reduce the dependence on oil by promoting alternate sources like renewable energy.