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[RSTV Archive] Subsidy Reforms & Fiscal Position

Finance Secretary has recently underlined the need for improving the fiscal position of the government through reforms in farm, food and fertilizer subsidies so that additional funds can be generated for the development of infrastructure and education systems.

In this article we will discuss and analyse all aspects of this issue.

Financial crunch of India

  • India’s fiscal deficit at 9.3% of GDP for FY21, down from a revised estimate of 9.5%.
  • This is expected to rise due to covid induced welfare schemes announced recently.

Role of Subsidies

  • In India, food and fertilizer subsidies formed a major chunk of the overall subsidy followed by education, health, corporate concession, etc.
  • Farm, food and fertilizer reforms are administratively easy but politically difficult in view of the ramifications.

At the present juncture we have two main kinds of buckets of reform-

  1. We have to set our fiscal house in order and also provide for the many things that governments legitimately should provide.
  2. We will need to reform some of our subsidies — farm subsidies, food subsidies, fertilizer subsidies. Some of them are intertwined with each other.

Burden of Subsidies in India

(1) Farm Subsidies

  • The continued trust in Centre is established with the ever-increasing support to farmers.
  • Various farm subsidies from the govt include fertilizers, farm credit, crop insurance and MSP etc.
  • A similar support from State Governments towards electricity power subsidies, irrigation subsidies crop insurance subsidies.
  • Public investment in agriculture through major irrigation projects by States, is almost equal to the annual farm subsidies of the Government of India.
  • In addition, 50% of the food subsidies are granted to farmers under National Food Security Mission, as 75% of rural population covered.
  • State Governments also waived farm loans of Rs. 1,22,000 crores.

Thus, farm subsidies form about two percent of India’s GDP.

(2) Fertilizer Subsidies

  • The government’s role in shaping the fertilizer landscape goes back to 1957 when it introduced the Fertilizer Control Order (FCO) to regulate the sale, price, and quality of fertilizers in the market.
  • This has not only contributed to the start of a green revolution but also increased the use of fertilizer by farmers and resulted in higher yields.
  • India is currently the second-largest consumer of fertilizer globally after China.

Over the years, the distribution of fertilizer in India became prone to leakages. This is due to:

  1. Lack of a dedicated fertilizer beneficiary database
  2. Absence of a cap on fertilizer entitlements (Presently farmers can buy any amount, irrespective of need)
  3. Different levels of subsidy provided to the manufacturing plants based on their cost of production
  4. Disproportionate use of urea as opposed to other types of fertilizer, such as fertilizers containing phosphorous (P) or Potassium (K) nutrients, or both.

(3) Food Subsidies

India has one of the largest food subsidy programmes in the world that has created a relatively effective social safety net.

  • Food subsidies are under increasing criticism because of its large contributions to government budget deficits, economic inefficiency and poor targeting.
  • The food subsidy bill is becoming unmanageably large.
  • For the 2021/22 fiscal year, India’s total outlay toward the food subsidy is expected to cross Rs 2.1 lakh crore.
  • The Economic Survey 2020-21 released on Friday recommended an increase in the issue price at which poor households receive food grains.
  • Central issue price (CIP) is the amount priority households pay, ₹2 per kg of wheat and ₹3 per kg of rice, to avail grain from the subsidized PDS.
  • This issue price for wheat and rice has not been revised since the introduction of the National Food Security Act in 2013.

The total cost of food subsidies that amounted to about 2.2 per cent of agricultural GDP during the 1990s increased significantly to about 5 per cent during the last decade.

Why these subsidies are a cause of concern?

  • Current level of fiscal deficit is difficult to address as even during 1991, fiscal deficit was around 7.5%
  • Historically countries like England and Germany faced similar problems during global meltdown.
  • Our type of subsidy pattern is similar to these countries.
  • Giving subsidies are not empowering people is not the true way. It is not helping the poors the way it should have been.

Challenges to bring subsidies reforms in India

  • Subsidy benefits are not reaching to intended person in supply chain due to leakages like middlemen in MSP payments, fertilizer leakage to industry, etc.
  • Over the years, subsidies have not empowered the poor people. Ex. Poor spends lakh and lakh of crores on health even after getting subsidy.
  • Political will and cooperation from opposition is required in bringing changes to subsidy structure. Ex. Due to lack of opposition support, farmers are protesting against new farm laws
  • Government needs to address those details mentioned in NFSA. Ex. Provision of providing rice at Rs. 3 per kg.

Subsidy reforms is really a big fraud affair that it’s hard for govt to go forward.

Way forward

  • Indian needs to implement Brazil “Conditional Subsidy Model” called ‘Bolsa Família’ which even Bangladesh has also adopted. It is based on conditional cash transfer.
  • Reform should be focused on two points – Direction of change and Time of change. In the direction of change, food subsidy reform should be at last due to covid.
  • There should be a public and private partnership model for community health center and public health center in rural India to utilize subsidies in a much better manner.
  • A voucher system can be the perfect alternative to food subsidy as it will significantly reduce administrative costs.
  • Active centre & states partnership is required to strengthen the health and education sector as both these comes under state legislature.
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