SUNEEL GUPTAASSOCIATE PROFESSOR

GHS-IMR,KANPUR

Subsidies in India

Subsidies are a kind of incentive which play an important role in economic development of developing countries. Subsidies bring out desired changes by effecting optimal allocation of resources, stabilizing the price of essential good & services, redistributing income in favor of poor people thus achieving the twin objective of growth & equity of nation.

Government subsidies may be defined as the difference between cost of delivering various publicly provided good & services and the recovering arising from such deliveries.

Subsidies are used to modify market outcomes, especially to take account of positive externalities, and, sometimes, to subserve certain well-defined redistributive objectives.

Rationale of Subsidies

Subsidies are justified in the presence of positive externalities because in these cases consideration of social benefits would require higher level of consumption than what would be obtained on the basis of private benefits only.

Subsidies, as converse of an indirect tax, constitute an important fiscal instrument for modifying market-determined outcomes. While taxes reduce disposable income, subsidies inject money into circulation. Subsidies affect the economy through the commodity market by lowering the relative price of the subsidised commodity, thereby generating an increase in its demand.

With an indirect tax, the price of the taxed commodity increases, and the quantity at which the market for that commodity is cleared, falls, other things remaining the same. Taxes appear on the revenue side of government budgets, and subsidies, on the expenditure side.

Subsidies are classified as

Public Good-defense, Police & General administration( non rivalry, excludability)

Merit Good- Protection against disease, environmental protection, education (external benefit to society)

Non Merit-Individual customer

Different types of subsidy

1. Cash Subsidy: Providing food or fertilizer to consumer at lower price.

2. Interest or credit subsidies3. Tax subsidies 4. In kind subsidies5. Procurement subsidies6. Regulatory subsidy

Economic Subsidies

Agriculture &Cooperation

(16.4)

Irrigation&

Flood Control(10.8)

Power &

Energy(7.6)

Industry(11.5)

Transport(7.3)

Communication & others

(2.4)

Social Subsidies

Education(22%)

Health(9%)

Water Supply&

Sanitation(5%)

Rural Housing and others

In India subsidies can be classified in two categories

Inter state variation

Proportionate distribution of subsidy is not done

Panjab, Haryana, Maharashtra,& Gujrat has 20% of population of India But they get 26% of subsidy. Where as UP,MP,Bihar & Orissa has 40% of population but they get 31% of subsidy

Bihar has more then 33% population below poverty line compared to other states but receive less then40% of average subsidy where in Punjab poverty is 54% less then average gets more the 40 % of average subsidy

In Panjab, Haryana, Maharashtra,& Gujrat 18% of rural population gets 25% of Subsidy where as in UP, MP, Bihar & Orissa 44% of rural population gets 29% of subsidy

Classification of Subsidy

Merit I: Elementary education, primary health centres, prevention and control of diseases, social welfare and nutrition, soil and water conservation, and ecology and environment.

Merit II: Education (other than elementary), sports and youth services, family welfare, urban development, forestry, agricultural research and education, other agricultural programmes, special programmes for rural development, land reforms, other rural development programmes, special programmes for north-eastern areas, flood control and drainage, non-conventional energy, village and small industries, ports and light houses, roads and bridges, inland water transport, atomic energy research, space research, oceanographic research, other scientific research, census surveys and statistics, meteorology.

Non-Merit: All others.

Central Budgetary Subsidies: Broad Magnitudes

Aggregate central budgetary subsidies in 1998-99 are estimated to be Rs. 79828 crore, amounting to 4.59 percent of GDP, and constituting 53.40 percent of the net revenue receipts of the centre, which is the highest draft of subsidies on revenue receipts recorded so far.

Explicit and implicit subsidies, are estimated at Rs. 79828 crore for 1998-99. This amounts to 4.59 percent of GDP at current market prices and 53.40 percent of net revenue receipts of the central government..

Social service subsidies in the central budget amounted to Rs. 14908 crore whereas subsidies in economic services are estimated at Rs. 64920 crore(1999). The share of subsidies in economic services was 81.3 percent in total subsidies. The scheme of classification of merit and non-merit subsidies Merit subsidies amounted to only Rs. 19728 crore, whereas a much larger share, amounting to Rs. 60100 crore has gone to non-merit subsidies. This accounted for 75.3 percent of the total subsidies. Also, in 1998-99, subsidies amounted to nearly 70.4 percent of fiscal deficit. Thus, almost all of the borrowing appears to have been exhausted by the provision of non-merit subsidies.

The central subsidies increased from 4.25 percent of GDP in 1994-95 to 4.59 percent in 1998-99. The increase is much larger compared to 1996-97 when the central subsidies on the basis of comparable methodology were 3.49 percent of GDP. Four reasons account for the inordinate increase in subsidies in 1998-99 in the last few years: (i) the impact of salary revisions in the wake of the recommendations of the Fifth Central Pay Commission; (ii) the degeneration of railways from a surplus sector into a subsidy sector; (iii) large increase in explicit subsidies of the centre; and (iv) increase in other input costs unaccompanied by any improvement in recovery rates.

Economic sector subsidies are nearly five and half times as large as those of the social sector. Heads arranged in diminishing order of size of subsidies are: agriculture and allied services, industry and minerals, energy, general economic services, and transport.

Central Subsidies According to Major Heads

Central Budgetary Subsidies: 1998-99(Rs. crore)

Social and Economic ServicesSocial and Economic Services CostCost ReceiptsReceipts SubsidySubsidy RecoveryRecoveryRate Rate

(Percent)(Percent)Current Current CapitalCapital TotalTotal

Social ServicesSocial Services 1432514325 13401340 1566515665 757757 1490814908 4.834.83

General EducationGeneral Education 49784978 3333 50115011 55 50065006 0.090.09

Elementary EducationElementary Education 23072307 77 23142314 00 23142314 0.010.01

Secondary EducationSecondary Education 10561056 1111 10671067 00 10671067 0.030.03

Univ. and Higher EducationUniv. and Higher Education 14721472 66 14781478 11 14781478 0.060.06

Other General EducationOther General Education 142142 88 151151 33 147147 2.242.24

Technical Education, Sports, Art and CultureTechnical Education, Sports, Art and Culture 12671267 8383 13501350 1010 13401340 0.720.72

Medical and Public HealthMedical and Public Health 14341434 8989 15231523 4242 14811481 2.772.77

Public HealthPublic Health 298298 1414 312312 99 303303 2.882.88

Medical Medical 11361136 7575 12111211 3333 11781178 2.742.74

Family WelfareFamily Welfare 313313 55 318318 1313 304304 4.134.13

Water Supply and SanitationWater Supply and Sanitation 613613 4848 661661 99 652652 1.411.41

HousingHousing 17511751 495495 22462246 6464 21822182 2.842.84

Urban DevelopmentUrban Development 7373 8888 161161 00 161161 0.030.03

Information and BroadcastingInformation and Broadcasting 19901990 225225 22162216 545545 16701670 24.6124.61

Welfare of SCs, STs and other BCsWelfare of SCs, STs and other BCs 8484 216216 300300 00 300300 0.000.00

Labour and EmploymentLabour and Employment 773773 00 773773 22 771771 0.290.29

Social Welfare and NutritionSocial Welfare and Nutrition 10441044 5151 10951095 6666 10291029 6.036.03

Other Social ServicesOther Social Services 44 77 1111 00 1111 1.081.08

Economic ServicesEconomic Services 7684276842 2987429874 106711067166

4179741797 6492064920 39.1739.17

Agr., Rural Dev. & Allied Agr., Rural Dev. & Allied ActivitiesActivities

1769117691 20432043 1973519735 546546 1918819188 2.772.77

Irrigation and Flood Irrigation and Flood ControlControl

241241 4646 287287 1010 276276 3.613.61

EnergyEnergy 27462746 1013610136 1288212882 50695069 78127812 39.3539.35

Industry and MineralsIndustry and Minerals 1032310323 96129612 1993519935 28332833 1710317103 14.2114.21

TransportTransport 3204132041 72397239 3928039280 3098230982 82988298 78.8778.87

PostalPostal 31733173 107107 32793279 17231723 15571557 52.5352.53

Science, Technology and Science, Technology and EnvironmentEnvironment

28432843 421421 32643264 3838 32263226 1.171.17

General Economic General Economic ServicesServices

77847784 270270 80548054 595595 74597459 7.397.39

Services/HeadsServices/Heads Relative Share in Total Relative Share in Total SubsidiesSubsidies

Social ServicesSocial Services 18.6818.68

General EducationGeneral Education 6.276.27

Elementary EducationElementary Education 2.902.90

Secondary EducationSecondary Education 1.341.34

University and Higher EducationUniversity and Higher Education 1.851.85

Other General EducationOther General Education 0.180.18

Technical Education, Sports, Art and CultureTechnical Education, Sports, Art and Culture 1.681.68

Medical and Public HealthMedical and Public Health 1.861.86

Public HealthPublic Health 0.380.38

Medical Medical 1.481.48

Family WelfareFamily Welfare 0.380.38

Water Supply and SanitationWater Supply and Sanitation 0.820.82

HousingHousing 2.732.73

Urban DevelopmentUrban Development 0.200.20

Information and BroadcastingInformation and Broadcasting 2.092.09

Welfare of SCs, STs and Other BCsWelfare of SCs, STs and Other BCs 0.380.38

Labour and EmploymentLabour and Employment 0.970.97

Social Welfare and NutritionSocial Welfare and Nutrition 1.291.29

Other Social ServicesOther Social Services 0.010.01

Economic ServicesEconomic Services 81.3281.32

Agriculture, Rural Development & Allied ActivitiesAgriculture, Rural Development & Allied Activities 24.0424.04

Irrigation and Flood ControlIrrigation and Flood Control 0.350.35

EnergyEnergy 9.799.79

Industry and MineralsIndustry and Minerals 21.4221.42

TransportTransport 10.4010.40

PostalPostal 1.951.95

Science, Technology and EnvironmentScience, Technology and Environment 4.044.04

General Economic ServicesGeneral Economic Services 9.349.34

Social and Economic ServicesSocial and Economic Services 100.00100.00

Chart 3.1: Relative Shares Arranged in Descending Order of Importance

0.00

5.00

10.00

15.00

20.00

25.00

30.00percent

Explicit subsidies rose sharply in the latter half of the nineties.

PeriodPeriod Food Food SubsidiesSubsidies

Fertiliser Fertiliser SubsidiesSubsidies

Interest Interest SubsidiesSubsidies

Total Subsidies*Total Subsidies*

1971-801971-80 32.2632.26 39.9839.98 38.5038.50

1980-901980-90 18.6718.67 29.6629.66 17.4617.46 21.0621.06

1990-001990-00 16.9116.91 12.8412.84 17.5217.52 9.199.19

1991-951991-95 23.7423.74 4.284.28 -34.57-34.57 -1.04-1.04

1995-001995-00 16.5316.53 19.4619.46 112.84112.84 18.9918.99

2000-042000-04 32.7132.71 -3.72-3.72 31.3431.34 24.8424.84

Explicit Subsidies of the Centre: Period-WiseTrend Growth Rates

Aggregate All India Subsidies

Aggregate budgetary subsidies of central and state governments are estimated to be 13.41 percent of GDP at market prices, and 85.8 percent of the combined revenue receipts of the centre and the states.

In a Resolution dated the 21st November, 1997, the Government of India had notified the details of a phased programme of dismantling of Administered Price Mechanism (APM) for petroleum products. Accordingly

(i) effective from 1st April, 1998, the consumer prices of all products (excepting motor spirit, high speed diesel, aviation turbine fuel, kerosene for public distribution system and LPG for domestic cooking) were decontrolled

(ii) from 1.4.2001 the prices of aviation turbine fuel were decontrolled; and

(iii) from 1st April 2002, consumer prices of motor spirit and high speed diesel will be market determined.

APMPhase – I (1996-98): Rationalisation of retention margin of refineries, deregulation of natural gas pricing, decanalisation of furnace oil and bitumen; partial deregulation of the marketing sector, with freedom to appoint dealers and distributors, removal of the subsidy on HSD and reduction of the subsidy on kerosene, LPG and input for fertiliser. Phase – II (1998-2000): Pricing of indigenous crude on the basis of average f.o.b. price of imported crude; rationalisation of royalty and cess; further deregulation of the marketing sector, further reduction of subsidy on kerosene, LPG and input for fertiliser.Phase – III (2000-02): Complete deregulation, including ATF, HSD and MS; and the subsidy on PDS kerosene and domestic LPG to be transferred to the general budget.

Fertilisers: Case of Inefficiency Promoting SubsidiesFertiliser subsidies promote inefficiencies and are ill targeted. These need to be reformed. Subsidisation should emerge at the end of the process for income support to small and marginal farmers.

Fertiliser SubsidiesIn a period of five years, fertiliser subsidies in their present form should be done away with and proper exit policy formulated for inefficient units. A limited amount of subsidies targeted to marginal poor farmers could be linked to actual purchases through a reimbursement system.

Food SubsidyIn the long-run, a properly decentralised two-tier intervention for food subsidisation should be developed and Centre should maintain only optimal buffer stock for strategic market intervention and for exigencies. Food subsidies should be delinked from policies to support agricultural incomes.

Irrigation SubsidiesA significant portion of irrigation subsidies goes to finance excess staff in the irrigation departments. There is a need to drastically prune the existing staff, reduce costs, and augment recoveries to cover at least the operation and maintenance costs.

Power Subsidies

Power subsidies largely subsidise inefficiencies. There is a need to reduce T&D losses, make subsidies more explicit, overhaul the Electricity Act and drastically prune staff strength in the SEBs.

Subsidisation of Agriculture

Input subsidisation should be avoided, support to agriculture incomes and food subsidisation should be delinked, and the two policy objectives should be served by separate policy instruments.

The following steps would need to be taken as part of the operational strategy to reform the subsidy regime:

(i) Each Department/Ministry/Enterprise should prepare a comparative picture of per unit costs and per unit receipts for all chargeable services;

(ii) Each unit should prepare a plan for reducing staff strength, by putting limit on fresh recruitment and developing a scheme for redeployment of staff, and introduction of voluntary and sometimes compulsory, retirement schemes.

(iii)Strategies of private provision of publicly provided private goods by sub-contracting, unbundling of public sector activities, and privatisation should be continually explored;

(iv)A mechanism for automatic (or linked to an index of cost) upward revision of fees and user charges should be introduced as guided by User Charges Commission or similar bodies;

(v)New public enterprises should not normally be set up any more; and

(vi)There should be a periodic review as to the utility of continuing a subsidy and a decision should be taken even at the initial stage of its introduction as to the life of the subsidy