Evaluate practicality of subsidy payment exercise by government

Definition of subsidy:

An assistance paid to a business or economic sector. Provide by government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labour. Can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports.

Type of Subsidies

Indirect subsidies : Does not involve direct transfer

Trade protection : Measures used to limit a given good than they would pay without the trade barrier; the protected industry has effectively received a subsidy. Such measures include import quotas, import tariffs, import bans, and others.
Consumption subsidies : By actually giving away a good or service, providing use of government assets, property, or services at lower than the cost of provision, or by providing economic incentives (cash subsidies) to purchase or use such goods. In most countries, consumption of education, health care, and infrastructure (such as roads) are heavily subsidized, and in many cases provided free of charge

Practicality of subsidy payment

Malaysian government subsidizes and controls prices on a lot of essential items to keep the prices low. Prices of items such as palm oil cooking oil, petrol, flour, bread, rice and other essentials have been kept under market price to keep the prices low. In order to reduce the income inequalities, the subsidy payment will be a tool to bring the gap close. As first we need to do by stabilizing their income. Subsidy is one of the mechanism by the government ot help people achieve the income stability. Today, both the rich and the poor benefit from subsidies which are actually meant for the latter.

Short term effects:

Market distortion, meaning the price of the commodity does not reflect its actual cost. This jeopardizes the national economy as it would lead to excessive fuel consumption and wastage in addition to unhealthy practices such as illicit trade, cheating and smuggling.
Smuggling and hoarding, which leads to shortages, is a prominent problem in Malaysia due to the subsidies. For example, cooking oil is subsidised for domestic use only. This situation creates an environment where industrial players hoard domestic cooking oil for industrial use.

The Government also has to spend more for enforcement personnel and equipment in order to arrest smuggling activities.

Long term effects:

Once we subsidise, the pricing structure is no longer true. Even worse for items such as petrol and other sources of energy of which pricing often in turn determines prices other than goods and services. When the pricing of a fundamental item or a service is not true, the retail prices of everything related to the subsidised items or services become artificial. In the end, we have an artificial economy. Minister in the Prime Minister's Department Datuk Seri Idris Jala said Malaysia's finances could collapse by 2019 if something is not done to its present subsidy structure. We can opt to continue with the subsidies but we will be living on borrowed time. By 2019, the country's debts will be equal to its gross domestic product (GDP), which means whatever we produce will go towards servicing debts - in other words, we will be a bankrupt nation.

Budget 2012
Government spend RM32,800 billion on the subsidies in the year of 2011. In the spirit of People First, all subsidies, incentives and assistance totalling RM33.2 billion (14.4%) from RM 230.8 billion will be continued.

To part subsidise the cost of houses under the Rumah Mesra Rakyat (RMR) programme, to help the low-income group own decent houses. Syarikat Perumahan Negara Berhad (SPNB) will build 10,000 units of houses under Rumah MesraRakyat (RMR), where each house will cost RM65,000 to build and will be sold at RM45,000 with the government providing a subsidy of RM20,000 per house. Interest rate subsidy of 2% per annum for 2 years on full loans for financing the purchase of new locally manufactured cars used as budget taxis and hire cars.

Allowance or subsidies from childcare up to RM2,400 per year. (income exempted from income tax) Subsidies on interest on loans totalling up to RM300,000 for housing, passenger motor vehicle and education. Various Subsidies on Domestic GoodsIncludes rationalised subsidies on rice, sugar, cooking oil, petroleum products and household electricity. This is reflected in the allocation of fuel subsidies amounting to RM17 billion for 2012