Context:
The government’s anticipated total expenditure on the three major subsidies – fertilizer, food, and cooking gas – in the current financial year is likely to be around Rs 400,000 crore, compared to the Rs 549,000 crore spent in the previous fiscal year (FY 2022-23). While it might seem that the government has made significant efforts to reduce subsidies, the situation on the ground suggests otherwise.
Relevance:
GS3-
Issues related to Direct and Indirect Farm Subsidies.
Mains Question:
It is estimated that during the current fiscal year, the total excess payment of the Government in fertiliser, food and gas subsidy amounts to Rs 26,490 crore, exceeding the budget estimates. Analyse the provision of subsidies from the perspective of fiscal prudence and economic growth. (15 Marks, 250 Words).
About Subsidies:
- A subsidy, defined as a benefit conferred upon an individual, company, or institution, is commonly provided by the government.
- Direct subsidies in India take the form of cash payments, while indirect subsidies include tax breaks and premium-free insurance.
- The primary purpose of subsidies is often to alleviate hardship, and they are generally perceived as being in the public interest to promote social well-being or specific economic policies.
There are six main categories of subsidies, each serving distinct purposes:
- Export subsidies – Provided to promote and support exports.
- Subsidies contingent upon the use of domestic over imported goods – Aimed at promoting domestic products over cheaper imported alternatives.
- Industrial promotion subsidies – Geared towards fostering specific industries.
- Structural adjustment subsidies – Intended to address and compensate for structural deficiencies in an economy.
- Regional development subsidies – Granted for the development of specific regions.
- Research and development subsidies – Aimed at encouraging and supporting research and development initiatives.
Subsidies can be further categorized by beneficiary:
- Non-specific subsidies – Not limited to specific businesses or industries.
- Specific subsidies – Limited to particular businesses and industries.
Other types of subsidies include:
- Product subsidy – Involves payments made per unit of a produced article or service, typically associated with manufacturing, selling, importing, transferring, leasing, delivering, or consuming a good.
- Production subsidy – Designed to increase the production of a specific good without raising the final cost to consumers.
- Consumer/Consumption subsidies – Reduce the price of goods and services for consumers.
- Government subsidies – Offered in various forms, including welfare payments and unemployment compensation, with the primary goal of assisting individuals facing temporary financial difficulties.
Subsidy on Fertilizers:
- The subsidy on each tonne of fertilizer, whether produced or imported, is the difference between the cost of production/import and distribution (cost of supply) and the maximum retail price (MRP) controlled by the Central government.
- Direct control is exercised over the MRP of urea, a major source of nitrogen (N), while control is indirect for other fertilizers carrying phosphate (P) and potash (K), which are decontrolled de jure.
- Manufacturers or importers receive subsidies to cover the gap between the cost of supply and the MRP.
Import of Fertilizers:
- India heavily relies on imports to meet fertilizer requirements, with 100% import dependence in ‘K’ and 80-90% in ‘P’.
- Approximately 25-30% of urea demand is met through imports. For domestic urea production, the country imports at least one-third of the natural gas (NG) requirement.
- International prices of fertilizers and fertilizer raw materials (FRMs) significantly influence the cost of supply and, consequently, subsidies.
- During FY 2022-23, global shortages caused by the Ukraine war led to a sharp increase in prices, resulting in actual fertilizer subsidy payments of Rs 254,000 crore against a budget estimate (BE) of Rs 105,000 crore.
- For FY 2023-24, Finance Minister Nirmala Sitharaman set the BE at Rs 175,000 crore, assuming a decline in international prices. Prices did decrease during the initial months, but from the third quarter onward, they rose again.
- The government had to make an additional allocation of Rs 13,351 crore in December 2023, over the BE of Rs 175,000 crore. The possibility of further price increases in January – March 2024 is not ruled out due to ongoing conflicts in the Middle East.
Other Associated Concerns:
- In terms of fiscal management, countervailing measures are typically employed to offset cost-push effects.
- However, in June 2023, the Modi government decided to maintain the MRP of urea at Rs 242 per 45 kg bag for another three years, despite not adjusting it for over two decades.
- Efforts to curb subsidized urea leakage, estimated at 30%, through measures like neem coating, have not yielded the desired results.
Food Subsidy:
- The food subsidy represents the surplus of the minimum support price (MSP) paid to farmers and the costs associated with handling and distribution over the heavily subsidized prices of Rs 2/3/1 per kg for wheat, rice, and coarse cereals, respectively, provided to 820 million beneficiaries under the National Food Security Act (NFSA).
- In the 2023-24 budget, Sitharaman had set the Budget Estimate (BE) at Rs 197,000 crore, a decrease of Rs 90,000 crore from the Revised Estimate (RE) for 2022-23, which was Rs 287,000 crore.
- In addition to the regular NFSA allocation, the RE for 2022-23 included subsidy payments for distributing 5 kg of cereals per month for free to all 820 million people under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), a scheme initiated in April 2020 in response to the Covid-19 pandemic. PMGKAY was discontinued from January 1, 2023, and supplies under the regular NFSA were made free until December 31, 2023.
- While ending free supplies under PMGKAY was justified as the pandemic had subsided, the savings from April to December 2023 were partially offset by making regular NFSA supplies free. The impact of these decisions was reflected in setting the BE at Rs 197,000 crore.
Concerns Associated with the Subsidies in the Food Sector:
- However, Modi’s sudden announcement in November 2023 to extend free supplies under NFSA for another five years changed the subsidy calculation.
- In the remaining three months (January – March 2024) of the current fiscal year, beneficiaries won’t pay anything instead of Rs 2/3/1 per kg for wheat, rice, and coarse cereals if the regular dispensation were to be restored.
- Combined with a hike in the MSP for all 14 kharif crops by 5-10 percent, announced in June 2023, this led to an increase in the food subsidy beyond the BE. To accommodate this, an additional provision of Rs 5,589 crore was made under this head in December 2023.
- Similar to fertilizers, significant reforms are not observed in the food sector to reduce the subsidy bill.
- The main issue with the current system is providing food at a heavily subsidized price, enticing unscrupulous entities to engage in diversion and misuse of the subsidized food.
- Prime Minister’s commitment to free food for five years ensures that this system will persist until December 2028.
Cooking Gas Subsidy:
- The cooking gas subsidy was initially set at Rs 2,250 crore in the BE, intended to provide a subsidy of Rs 200 per cylinder to 96 million households under the Pradhan Mantri Ujjwala Yojana (PMUY).
- However, from October 5, 2023, the subsidy was increased to Rs 300 per cylinder.
- Post-budget decisions, including plans to provide an additional 7.5 million connections under the scheme, resulted in excess payments.
Conclusion:
Consequently, the Centre is projected to spend Rs 400,000 crore against the BE of Rs 374,000 crore, with no direct control over subsidies. The primary drawback of the existing food subsidy system lies in providing food at extremely low prices, which attracts unscrupulous individuals to purchase it inexpensively and resell it at higher rates.
