Controlling Expenditure on Subsidies

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• With Budget Day approaching, the Centre’s spending on food and fertiliser subsidies are likely to come under close scrutiny.

Trends for Food and Fertiliser Subsidies

• Before COVID-19: A Significant Drop:
  • Between 2015-16 and 2019-20, the aggregate outlay on the two fell, both in absolute terms (from Rs 211,834 crore to Rs 189,813 crore) and as a share of the Centre’s total expenditure (from 11.8% to 7.1%). 
  • A further drop, to Rs 186,879 crore and 6.1%, was projected in the Budget for 2020-21 presented on February 1, 2020.
• Post COVID-19: Rising Again:
  • The declining trend has since completely reversed. 
  • The combined food and fertiliser subsidy bill in the revised estimates for 2020-21 was a massive Rs 556,565 crore, representing 16.1% of the Centre’s entire Budget. 
  • While the budget estimates for 2021-22 stood lower, they are still way above the trend till 2019-20.

Reasons for Reversal

• Increasing Cost:
  • Until last year, the Centre was not providing fully for the subsidy.
  • Now the cost of FCO has increased. 
• Covid:
  • The other reasons have been Covid (in respect of food subsidy) and soaring international prices (vis-à-vis fertilisers).
  • The post-Covid crisis led the Centre to not only distribute, but also procure, unprecedented quantities of grain. 

Subsidy

• Background: 
  • Economic reforms: 
    • Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P and K (nitrogen, phosphorus and potassium), and reduce water and air pollution caused by fertilizers like urea.
  • Share in GDP: 
    • Agriculture has a share of around 15% in gross domestic product (GDP) and nearly 60% of the population derives its livelihood from it.
  • For 2021-22, the Union Budget has estimated fertilizer subsidies to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.
• Meaning:
  • A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain goods and services. 
• Types:
  • Production subsidy:
    • This type of subsidy is provided in order to encourage the production of a product. 
    • In order for manufacturers to increase their production output, the government compensates for some of its parts in order to lessen their expenses while increasing their output. 
    • The drawback of such an incentive is that it may promote overproduction.
  • Consumption subsidy:
    • This happens when the government offsets the costs of food, education, healthcare, and water.
  • Export subsidy:
    • A country or state earns from its exports and exports help to balance its economy. 
    • That is why, to encourage exports, the government subsidizes the cost. 
  • Employment subsidy:
    • This incentive is given by the government to companies and organisations in order to enable them to provide more job opportunities.

Benefits

• Lowering prices and controlling inflation:
  • They are especially applicable in the area of production cost inputs such as fuel prices, particularly when global crude oil prices are rising. 
• Preventing the long-term decline of industries:
  • There are many industries that should be kept alive and functional, such as fishing and farming because they are essential to support a population. 
  • Many new and fast-growing industries may also benefit from being subsidized.
• A greater supply of goods:
  • Governments want to increase the access of their population to Goods & Services such as Water, Food, and Education. 
  • They, therefore, provide an incentive that could be in the form of a tax credit or even straight up cash. 

Issues/Challenges 

• Policy and price changes: 
  • Farmers tended to move towards balanced use, but policy and price changes reversed the favourable trend a couple of times in the last three decades.
• Uncontrolled increase in subsidies on urea: 
  • There has been an uncontrolled increase in subsidies on urea, due both to almost freezing the MRP of urea in different time periods and its rising sale leading to an increase in indiscriminate and imbalanced use of fertilizers.
• Shortage of supply:
  • Ultimately, subsidies can lead to very high demand that causes an increase in prices.
• Difficulty in measuring success:
  • Subsidies are usually effective and helpful. But it is hard to quantify the success of subsidies.
• Higher taxes:
  • The government raises funds to use for subsidizing industries, by imposing higher taxes. 
  • So, it is the general population and corporations who provide the means to enable the government to subsidize industries.
• Unsustainable fiscal deficit:
  • Subsidies are paid at the cost of development expenditure.
• Cropping pattern:
  • Subsidies distort cropping patterns as well.
  • Fertiliser subsidy primarily benefits the fertiliser producers and big farmers.
• Incentive to improve:
  • Subsidies reduce the incentive to improve, thus encouraging inefficiency.

Way Ahead

• India plans to increase 2021-22 fertilizer subsidies to a record of more than 1.55 trillion Rupees ($20.64 billion) ($1 = 75.1080 Indian Rupees) to avoid shortages amid a sharp increase in global prices of the chemicals.
• The need is for more substantive measures to rein in subsidy. 
• These include hiking PDS issue prices, capping grain procurement, decontrolling urea and providing a fixed per-tonne nutrient-based subsidy similar to that for other fertilisers. 

Source: IE