Union Budget: The subsidy knot

By: | Updated: February 23, 2015 3:54 PM

The Budget for FY16 is set to be a landmark Budget in several ways. It is expected to not only draw the tax policy roadmap for the remaining...

The Budget for FY16 is set to be a landmark Budget in several ways. It is expected to not only draw the tax policy roadmap for the remaining years of the current NDA government’s tenure, it has to also draw a strategy for curtailing subsidies and boost investment, both public and private. Subsidy projections and handling, therefore, will play a key role in the coming years in the government’s fiscal management.

The provisional account of FY14 shows that the expenditure on major subsidies stands at R2,45,452 crore—food at R92,000 crore, petroleum at R85,480 crore and fertiliser at R67,972 crore.

In FY15, major subsidies are budgeted at R2,51,397 crore in BE 2014-15. As a percentage of GDP, total subsidies were at 2.3% in FY14, and are budgeted to be at 2% in FY15. According to the government’s medium-term fiscal strategy, which has outlined that fiscal consolidation will be difficult without focused subsidy reforms, with active policy reforms it can go down to 1.7% and 1.6% of GDP in FY16 and FY17, respectively.

The Subsidy knot | Create infographics

For this, the government will have to raise prices of the subsidised goods gradually as has been successfully done for diesel and also curb leakages through Aadhaar-based direct transfers.

Diesel has shown the way for a similar exercise in fertiliser and LPG. Though a 58% decline in crude prices since June 2014 will help government curtail the subsidy burden in FY15, a concerted strategy is required here to take care of possible upside in the crude prices.

In food, a restructuring of FCI functioning to procure economically and cash transfers to cut leakages is a necessity.

The FY16 subsidy numbers would be keenly watched as it will be an indicator of how serious the government is on expenditure reforms.

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