Context: While the first term of the present government saw a sharp reduction in subsidy burden of the government despite increasing provision of essential services in the form of schemes by the Central Government.
However, the second term has seen a sharp uptick in the subsidy over food and fertilizer due to COVID-19 pandemic and war.
The coming elections are also expected to increase the subsidy burden of central government.
Evolution of subsidies in recent times
Period between 2014-19:
- This period saw many schemes being launched for ensuring universal access to housing (PMA&-U & PMAY-G), toilets (SBM), drinking water (JJM), bank accounts (PMJDY), electricity and cooking gas (Ujjwala).
- This led to increased access to essential goods and services among the people. This phase of subsidies was labelled as 'New Welfarism'.
- However, despite this Centre's subsidy bill fell, both in absolute and relative terms. As compared to 2013-14, center’s outgo on food and fertilizer subsidy dropped from 2.2% of GDP to around 1% in 2018-19.
- If we add the expenditure on welfare schemes such as MGNREGA and PM-KISAN, the decline was from 2.5% of GDP to 1.4% of GDP.
Reasons for decline in GDP between 2014-19
- Easing of international crude prices: The cost of crude imported by Indian refiners dropped from $96 in the period 2008-13 to $61 in the period five-year period 2014-19.
- Removing of subsidies on Petrol and Diesel and was limited to only to LPG for cooking gas for households and providing connections to poor/low-income households.
- Government did not entirely pass through the benefits of low crude oil prices to the citizens but increased the excise duties on petrol and diesel and other fuel products. This led to increased taxes for government and decline in the fiscal deficit and subsidy burden.
- Similarly, lower fertilizer prices in the international markets led to reduced subsidy burden for Central Government.
Period between 2019-2023
- Major subsidies soared from 1% of GDP in 2018-19 to 3.6% of GDP in 2020-21.
- If we add the expenditure on MGNREGA and PM-KISAN to the subsidies, the total outgo has increased from 1.4% of GDP to 4.4% of GDP.
Drivers of increase in subsidies between 2019-23
- Central Government's decision to fully provide for food and fertilizer subsidy:
- Case of food security: Before 2015, the difference between FCI's economic cost and issue price was bridged by FCI by borrowing from the National Small Savings Fund (NSSF) or from the banks. This led to the food subsidy being accounted as an off-budget item and did not reflect in the fiscal deficit or subsidy numbers of central government. However, finance minister made a one-time provision enabling FCI to repay its outstanding NSSF loans.
- Case of fertilizer subsidy: Fertilizer firms selling nutrients at prices below production or import cost where also resorting to off-budgeting borrowings to address their deficits. Finance Ministry also settled the dues of fertilizer industry.
Both these steps led to Centre's overall subsidy spiking in 2020-21.
- Government expenditure to address Pandemic induced economic distress: To address the economic distress induced by the COVID-19 pandemic and lockdowns. Government took the following steps which also spiked the subsidy outgo significantly:
- Doubling of monthly grain (rice and wheat) quota for beneficiaries between April 2020 to December 2022.
- Increase in the demand for MGNREGA in rural areas to address rural distress. The year 2020-21 and 2021-22 saw a time high 389 crore and 363 crore person days of employment generation under the scheme as compared to 267 crore and 265 crores in 2018-19 and 2019-20.
3. Impact of Russia-Ukraine War: Russia Ukraine war led to sharp increase in the fertilizers in the international markets. Average landed price of imported urea increased from $263 per tonne in 2020-21 to $661 in 2021-22. Similar increases were also witnessed in DAP and muriate of potash. However, domestic prices of fertilizers were controlled for protecting the farmers income and food security of the country. This led to near doubling of fertilizer subsidy between 2020-21 and 2022-23.
Way forward
- Revising Issue prices for wheat and rice under PDS: The issue prices for wheat and rice were fixed at Rs 2 per kg for wheat and Rs 3 per kg for rice in 2013. These prices have not been revised since then. The issue prices under PDS have been further reduced to zero, thus adding to the subsidy burden. There is a need to further revise these prices to reduce the subsidy burden.
- Revising issue prices for Urea: Maximum retail prices of urea has remained fixed at Rs 5,360 per tonne since 2012. There is a need to revise these prices at regular intervals.
- Increasingly resorting to Direct Benefit Transfers to enhance the efficiency of subsidies.
- Focusing of income support schemes such as PM-Kisan to help the low-income households as compared to subsidizing the prices of goods and services.