Subsidy reforms are needed for fiscal consolidation?

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Question – Subsidy reforms are needed for fiscal consolidation. Comment with arguments on the major reforms undertaken by the Government of India in the last decade. 16 March 2022

AnswerSubsidy is a direct or indirect transfer of money from the government to an entity. It is usually in the form of a cash payment, or a targeted tax cut. It leads to a fall in price of the subsidized product.

There are three major subsidies in India:

  • Food Subsidy,
  • Fertilizer Subsidy, and
  • Subsidy on Petroleum linked products.

(The subsidy on petroleum-linked products is over and the subsidy on food is rising.)

Recently, the Finance Secretary said that when the country is fighting the epidemic, it is a difficult choice to change these two major subsidies. He acknowledged that food subsidies will remain, and that the issue is about fertilizer subsidies.

The government favors fertilizer subsidies to reach farmers directly rather than through companies. In this direction, the government is working on a direct benefit transfer scheme.

Why are subsidy reforms needed?

  • The fiscal deficit of the government for 2022-23 is estimated to be Rs 16,61,196 crore, and it has been noticed that certain announcements made post-budget have also put pressure on the fiscal health of the government.
  • The fiscal deficit during the crisis of 1991 was 7.8 percent while in the current situation it is declared to be around 6.9 percent. The figure might be higher as we reach near the fiscal year-end. So this is a crucial issue that has to be addressed.

Nature of Reform:

If the government wants to reform the subsidy regime, it must focus on all aspects of subsidies, apart from focusing on food and fertilizer subsidies. Because ultimately what matters is whether the subsidy is serving its purpose or not.

As far as agricultural and rural communities are concerned, from 1950 till today, the economy has been provided with only crutches in the form of subsidies rather than addressing the real issues.

In case of health expenditure, in Uttar Pradesh almost 70 percent of the health expenditure is out-of-pocket expenses, which means that the poor are spending a lot, and not getting appropriate care. Hence, this is a crucial sector that needs reforms.

Following are some important subsidy reforms undertaken by government of India:

  • Fossil fuel subsidy: Subsidy on diesel has been removed and the transition to Direct Benefit Transfer (DBT) to give LPG subsidy continues. LPG subsidy is given to around 165 million, including a large number of affluent individuals.
  • There are two broad LPG subsidy types in India: a combination subsidy called the Pradhan Mantri Ujjwala Yojana (PMUY) which is directed towards women’s bank accounts, and a consumption subsidy called PAHAL (direct transferred benefits).
  • Procurement of food grains through the Public Distribution System (PDS) has helped in stabilizing prices, improving farmers’ welfare and ensuring food security across the country.
  • Reforms like e-NAM and Bhavantar Bhugtan Yojana help farmers to monitor prices of agricultural commodities and deal with falling prices.
  • Two-thirds of Indians qualify for highly subsidized food under the National Food Security Act (NFSA), carried out through the Food Corporation of India (FCI). Whereas FCI owes huge subsidy to the government and FCI suffers from operational inefficiencies.

As the current method of food subsidy is considered inefficient, there is a need to think about alternatives. There are two alternatives:

Government can issue vouchers to the poorest of the poor, allowing them to buy food on the basis of that voucher. It is going to bring down the expenditure involved in the administrative procedures such as on Food Corporation of India, etc. This will help the government to just maintain the buffer stock rather than managing each and every expenditure.

Another option is the critical experience of Brazil which has implemented a “conditional cash transfer scheme”. It will also help in bringing down the expenditure of the government as well as the overall fiscal pressure.

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