The budget introduced by Finance Minister for 2011-12 shows 9 percent of central budget is allotted to subsidies, which accounts to 1.43 lakh crore rupees. However, the expenditure on subsidies mentioned in the budget is only explicit portion of central government subsidies. It doesn’t include the implicit subsidies like tax exceptions to SEZ’s, land acquired by the government for industrial purposes, etc. And also, subsidies mentioned in the budget only related to Central subsidies, it doesn’t include the states explicit and implicit expenditure on subsidies. So the amount of subsidies in India is colossal than on paper.
Subsidy is a benefit given by the government to individual or group usually in the form of cash payment or tax reduction. Subsidy is often considered to be in the interest of the public. Cash subsidies, Interest or credit subsidies, tax subsidies, in kind subsidies, procurement subsidies, regulatory subsidies are forms by which government is providing subsidies to individual consumers. Protection of the vulnerable sections is the main intention of government to provide subsidies to individuals. The state has been using subsidies as an important tool in its operational administration. It is quite debatable whether these subsidies are reaching the target section or not. Think tankers thrive to formulate populist policies resulted in inclusion of major part of the population in the subsidy purview, which ultimately increased the weight of subsidies. After implementing the subsidy strategy for decades, people are used to the subsidies, and now it seems, citizens are expecting the subsidies as a matter of right. In the process of changing the role of Government in Indian economy from the driver to a facilitator, Government is keen on reducing the subsidy weight from its expenditure without harming the poor.Approximately, 90 percent of the total explicit subsidies accounts to food, petroleum and fertilizer subsidies. Obviously, if explicit subsidies have to be reduced, then steps have to be taken to limit these three subsidies. Minimum support price, public distribution system, food procurement and maintaining buffer stocks are important components of food subsidies. Purchase of food grains at minimum support price from farmers by government, without any limit has resulted in the creation of buffer stocks in excess of its storage capacity. There are substantial leakages of food grains in public distribution system. For all these years, the state has been succumbing to farm lobby pressures, thereby responding by raising minimum support price and also undertaking unlimited procurement. Kerosene and LPG subsidies accounts major part of petroleum subsidies. According to a government report, about half the subsidized kerosene supplies diverted and never reaching intended groups. Different approach has been adopted for fertilizer subsidy, where the subsidy amount is paid to industry than government. The most contentious issue surrounding fertilizer subsidies in India is how much of what is paid out actually finds its way into the pocket of the farmer, and how much is siphoned away by the fertilizer companies. Overall, there is substantial scope for improvement in the system and reducing subsidy weight of the government. In this year budget speech, finance minister has announced that government is considering direct cash subsidy on kerosene and fertilizers to genuine beneficiaries.
Subsidies can be reduced if Government has the political will to undertake hard decisions. However, coalition governments which try to appease various social groups find it extremely difficult to do so. The political economy of subsidies prevents the government not to go ahead with a policy of reduction of subsidies. One side, central government keen on reducing the subsidy and other side states are coming up with a plethora of subsidy policies shows, lack of integrated planning between center and states to curb the irregularities and reducing the subsidy expenditure. There is large gap between policy and practice. Government subsidies are meant for protecting the poor and government subsidy policies should be reinforced in such a way that they should reach only to the right beneficiaries. But, to do this, Government requires great amount of courage.
