Monday, April 2, 2012

Subsidies composition in India

In the Budget, the Finance Minister proposed restricting subsidies to under 2 per cent of the gross domestic product (GDP) in 2012-13. The plan is to further prune this to under 1.75 per cent over the next three years. Many economic commentators are sceptical about this. With high crude oil prices, pending reforms in the fertiliser sector, and the impending Food Security Act, they believe that the subsidy burden is being under-estimated — just like in the past, when the actual outgo on subsidies far exceeded ambitiously low targets.

Consider the just-ended 2011-12. Last year's Budget had estimated subsidies at Rs 143,570 crore. As against this, the revised estimate of subsidies stands at Rs 216,297 crore, higher by more than 50 per cent. Overall, the actual subsidies accounted for around 2.5 per cent of GDP, against the budget target of 1.5 per cent. The script is similar for earlier years too.

The variance was particularly acute in 2008-09. The oil shock and a sharp increase in fertiliser subsidy that year caused overall burden to zoom to 2.3 per cent of GDP against the budget estimate of 1.3 per cent. Prior to 2010-11, in addition to cash, the government used to also issue bonds in lieu of subsidies. These bonds were treated as 'below-the-line' and did not form part of the subsidy calculations in the budget. If these were also taken into account, subsidy as a percentage of GDP would have shot up to more than 4 per cent in 2008-09.


Subsidies on food, fertilisers, and petroleum products account for the bulk (around 95 per cent) of the government's subsidy burden. Together, these are called the 'major subsidies'. Subsidies on interest and other heads form the rest. Budget estimates have traditionally allocated greater amounts to food subsidy followed by that on fertilisers and petroleum. But with the sharp rise in crude oil price and increasing outgo on fertilizer subsidies, the variance between actuals and budgets under these heads has been quite high over the years. The revised estimates for 2011-12 show that food, fertilisers, and petroleum subsidies each accounted for nearly a third of the major subsidies.

The government's major subsidy burden has ballooned over the years from Rs 67,498 crore in 2007-08 to Rs 208,503 crore in 2011-12. Yet, the major subsidy bill in the 2012-13 Budget has been pegged lower at Rs 179,554 crore. This suggests significant reforms in fuel and fertiliser pricing, and targeted subsidy distribution mechanisms in the coming year.

But with the economic and political compulsions facing the government, it remains to be seen how far the reforms are carried through. Also, the Finance Minister has announced that from 2012-13, subsidies related to food and for administering the Food Security Act will be fully provided for. This might well lead to the actual food subsidy bill exceeding the budget estimate by a wide margin.

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