A study by the Planning Commission estimated that, to transfer Re 1 to the poor, the government spends Rs 3.65 in the form of food subsidy. What does this finding show?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Cash transfers would lead to an increase in welfare.
The finding is about how costly food subsidy is as a way to help the poor. If Rs 3.65 is spent so that Re 1 reaches the poor, most of the money is used up on the way. Giving the same help as cash transfers would cost less, so welfare would rise.
Option (1) Food subsidy should be raised so that it reaches more poor families. — Incorrect. A bigger food subsidy would only spend more for each rupee that reaches the poor.
Option (3) Food subsidy is the cheapest way of transferring income to the poor. — Incorrect. The finding shows the opposite: Rs 3.65 is spent for every Re 1 that reaches the poor, so food subsidy is a costly way of helping them.
Option (4) The government should pay for food subsidy by borrowing from the RBI. — Incorrect. Borrowing from the RBI changes only how the subsidy is paid for. It does not lower its cost, which is what the study measures.
NCERT (2026-27): “Deficit Reduction: Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature – they impact all income groups equally). There has also been an attempt to raise receipts through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration. A recent study7 by the Planning Commission has estimated that to transfer Re1 to the poor, government spends Rs 3.65 in the form of food subsidy, showing that cash transfers would lead to increase in welfare. …” |