The complete truth about subsidies

Tue, 26 Nov Pre-Open

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Subsidies doled out by the Indian Government have often been blamed for the mess in the Indian economy. A lot of quantitative analysis has been done based on the budgeted subsidy numbers that gives out the huge opportunity costs we have incurred. However, as an article in Business Standard suggests, the situation is far more grim than what the numbers suggest.

The basic flaw lies in the way the Government quantifies subsidies in the Budget documents. As the article suggests, there is a lot of discretion involved with regards to what expense qualifies as a subsidy. The huge uneconomic expenses under the schemes such as employment guarantee, loan waivers and food security are not reflected in the budgeted subsidy numbers. This is different from internationally accepted definition of subsidy that includes all uneconomic expenses. Hence, if you were worried about the rising subsidy burden in the budget documents, probably you should worry even more. This is because the huge subsidy burden is actually understated.

As the article suggests, a more realistic estimate is the data from National Account Statistics maintained by the Ministry of Statistics and Programme Implementation(MoSPI) which quantifies subsidies as per the international norms. Needless to say, the subsidy burden as per MoSPI is much higher than what is reflected in the Budget documents.

As per the article, the Budget documents suggest that the subsidies stood at around 2.72% of the nominal GDP. In comparison, the MoSPI data puts subsidy burden at around 6.08% of nominal GDP. The total subsidies thus accounted for around 40% of the government expenditure. It is important to note here that these numbers don't include impact of food security which will be reflected in the current year. Hence, we should be prepared for further rise in the subsidy burden and deterioration in the economy. But this will not be reflected in budget documents. Infact, it is ridiculous that the subsidy burden (as a % of GDP) is actually expected to drop in FY14.

Unfortunately, the huge amounts squandered on accounted and unaccounted subsidies have not benefitted anybody. While such uneconomic expenses may help the Government gain short term popularity, they come with huge opportunity costs and cause long term irreparable damage to the economy. If the Government had rather invested in creating infrastructure and making the economy more competitive, perhaps there would not have been a need of subsidies in the first place. But the lack of transparency in the Government accounts suggests that short term political motives have taken over the long term economic interests of the nation.