How the govt altered subsidy payouts but kept fiscal deficit in check

20 January, 2017

In 2011-12, the then United Progressive Alliance government struggled to contain the fiscal deficit as revenue collections failed to keep pace with a rise in expenditure. A major reason for the fiscal gap ballooning to 5.7% of gross domestic product that year was a rise in subsidies, mainly for petroleum products.

The fuel subsidy bill jumped 78% in 2011-12, increasing the total subsidy bill by a fourth. Since then, however, the Manmohan Singh-led UPA government and the Narendra Modi-led National Democratic Alliance government have kept the subsidy bill little changed around Rs 2.5 trillion. And that has helped narrow the fiscal gap.

Still, there has been a noticeable change in the main components of the subsidy bill. While fuel subsidy in 2015-16 fell to a third of its level in 2012-13, food subsidy jumped by two-thirds over the same period.

This is because the government ended its control over petrol and diesel prices in 2010 and 2014, respectively, and so doesn’t provide any subsidy for these two fuels any longer. A drop in crude oil prices has helped, too, as India imports more than three-fourths of its requirement. 

Also, three years ago the government passed a food security law to provide subsidised food grains to the poor. Food subsidy now accounts for more than half the total subsidy for 2016-17.

Another large component of the subsidy bill, fertiliser, has risen over the past few years, albeit at a slow pace.

If the recent trend is anything to go by, the government will keep the subsidy bill in control in the upcoming budget as well. That will help check the fiscal deficit. Credit rating firm Moody’s expects the government to meet its fiscal deficit target for 2016-17, which is 3.5% of GDP.

This, in turn, will rein in government borrowing, keep interest rates low and strengthen the overall economy.

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How the govt altered subsidy payouts but kept fiscal deficit in check

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