Subsidies in India - Agenda For Reform

Agenda For Reform

The study brings to the fore the massive magnitude of subsidies in the provision of economic and social services by the government. Even if merit subsidies are set aside, the remaining subsidies alone amount to 10.7% of GDP, comprising 3.8% and 6.9% of GDP, pertaining to Centre and State subsidies respectively. The average all-India recovery rate for these non-merit goods/services is just 10.3%, implying a subsidy rate of almost 90%.

The macroeconomic costs of unjustified subsidies are mirrored in persistent large fiscal deficits and consequently higher interest rates. In addition, unduly high levels of subsidisation reflected in corresponding low user charges produce serious micro-economic distortions as well. Its prime manifestations include excessive demand for subsidised services, distortions in relative prices and misallocation of resources. These are discernible in the case of certain input based subsidies. These problems are further compounded where the subsidy regime is plagued by leakages which ensure neither equity nor efficiency.

The agenda for reform should therefore focus on:

• Reducing the overall scale of subsidies
• Making subsidies as transparent as possible
• Using subsidies for well defined economic objectives
• Focusing subsidies to final goods and services with a view to maximising their impact on the target population at minimum cost
• Instituting systems for periodic review of subsidies
• Setting clear limits on duration of any new subsidy schemes