Answer: In the Budget 2024-25, the Government of India (GOI) has lowered down allocation to  subsidies by 7% amounting to ₹3.81 Lakh crore which forms roughly 10% of the total Revenue expenditure (RE). However, the Fiscal deficit is still as high as 5.8% of the GDP, against the target of 3% set by Fiscal Responsibility & Budget Management Act 2003. 

The rationale behind Subsidies provided by the GOI

• Promoting Domestic Production: Businesses require protection from outside competition to maximize domestic production & GDP  

• Eg - Subsidies to Textile Production under SAMARTH scheme to make Indian textile competitive against cheap & quality textiles from Bangladesh & Vietnam etc

• Promotion of Exports: Subsequently by making Indian products more competitive, it boosts exports thus narrowing Current Account Deficit (CAD) & stabilizing Balance of Payment (BOP): 

• Eg - Incentive in form of duty credit under Merchandise Exports from India Scheme (MEIS) 

• Ensure Socialist principles: Constitutional directive under Article 38 established India as a “Socialist” state which aims to ensure Socio-economic justice by minimizing inequalities in income, status, facilities & opportunities:

• Thus Subsidies ensure Government's intervention in priority sectors for “inclusive development”. 

• Means of Poverty Alleviation

• Eg - Subsidized food under National Food Security Act 2013 to ensure food security & upgrade Nutritional status of 75% of population 

• Maintain Inflation: Subsidies on essential fuel like cooking gas & kerosene provide energy at lower cost to rural & low income households and thus keep inflation in check

• Eg- Subsidy is provided for LPG cylinders under PAHAL scheme 

• Support to Farmers: Farm subsidies supplements Farmer's income, increase in food production & provide  access to high quality of seeds & fertilizer: 

• Eg - Direct subsidy under PM-KISAN scheme under which ₹2000 is transferred to farmer's bank account every quarter of Fiscal year 

• Environment Protection: Subsidies can also direct Industrial policies towards Environment friendly practices in coordination with India's Panchamrit Target to become Carbon neutral by 2070.

• Eg- Demand incentive of ₹15,000 per KWH is provided to buyers of Electric Vehicles (EV) under FAME scheme 

Issues revolving around Subsidies: A trade-distorting practice: 

• Vote Bank politics: With year around elections, subsidies or “freebies” has become tool to gain political traction often referred as “Rewadi culture”: 

• For example, Subsidies offered during Legislative Assembly elections in Punjab, amounted to an additional fiscal deficit of 3% on State-GDP. 

• Low spending on Infrastructure: The more States spend on transfer payments, the less they have for spending on physical and social infrastructure.

• Increasing Fiscal burden: As per Budget 2024, the Fiscal Deficit which reflects at the borrowing needs of the Government stands at 5.8% of the GDP, of which Subsidies forms major component:

• As per IMF, the borrowing of today forms the “tax burden” on future generations and thus there is immediate need for rationalization of subsidies 

• Transferring the burden: Several Economists have pointed out that the cost of subsidies is ultimately borne out by the larger public in the form of direct & indirect taxation.

• For example, Subsidized air-ticket prices under UDAN scheme leads to increase in the prices of tickets for Non- RCS (Regional Connectivity Scheme) routes. 

• Inefficient Agricultural subsidies: Indirect subsidies such as Minimum Support Prices (MSP) amounts to 2% of the GDP of the country: 

• Altered production pattern: MSP has led to concentration of production in Cereal crops (Rice, wheat etc) irrespective of crop suitability for the region

• Desertification: Due to over exploitation of Natural resources caused by subsidies for power, irrigation & fertilizer 

• Distortion of “Open & Free” Market economy: Subsidies cause misalignment between prices & production cost: 

• It creates a “Dual market” economy where the government delivers goods and services at subsidized prices to certain citizens, whereas others purchase the same at its regular market price.
• This creates issues such as illegal diversion of supplies, adulteration, and the emergence of parallel markets.

• Distorted Expenditure Priorities: Subsidies can lead to distorted spending, diverting resources from growth-enhancing investments and exacerbating social inequalities.

• Widening Inequalities: The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.

• Eg - As per World Inequality Report 2022, the top 1% of India held 22% of the total national income as of 2021.

Way forward: 

Rationalization of Subsidies for Sustainable Growth

• Impetus on “Essential” goods: Subsidized delivery of essential cereals such as Rice, wheat & pulses  for nutritional growth shall be continued under PM- Garib Kalyan Anna Yojana 

• Data based targeting: Leveraging technologies such as Artificial Intelligence, Quantum Computing etc for identification of beneficiaries can be deployed for various subsidies 

• Adopting Fiscal prudence: Diverging from Populist policies, the Government needs to adopt Fiscal prudence by eliminating unnecessary subsidies.

• Eg - As per Forbes India, the Budget Allocation to Subsidies has come down to ₹3.81 lakh crore in Budget 2024-25 from ₹4.14 lakh crore in FY 2023-24. 

• Seeking Alternatives: Eg - Adoption of “Universal Basic Income” can remove issues of Corruption & Leakages in Subsidies 

Subsidies are a must to ensure welfare of the poor as they help in improving access to education and bridge socio-economic divides across communities. However, these can be rationalized in order to reap optimum benefits for a developed India (Viksit Bharat) by 2047.