State governments continue to devote a sizeable share of their budgets to subsidies, underscoring their role in welfare delivery while intensifying pressure on public finances. Support directed largely to the power and agriculture sectors remains a major component of states’ revenue expenditure, raising concerns about fiscal sustainability and the limited headroom available for capital investment.
In 2023-24, states spent about ₹3.30 lakh crore on subsidies, making them one of the largest items within revenue expenditure. Energy utilities and agriculture-related activities were the principal beneficiaries, together accounting for nearly 73% of total subsidies disbursed by states, according to data from the Comptroller and Auditor General of India.
Dominating 73% of Fiscal Support
Energy subsidies emerged as the single largest component, amounting to ₹1.45 lakh crore during the year. A decadal analysis covering 2014-15 to 2023-24 shows that subsidy spending has, in most years, hovered around 8% of the combined revenue expenditure of all states.
Energy subsidies, largely in the form of free or concessional electricity for farmers and households, absorbed close to half of the total subsidy outgo. These measures reflect states’ efforts to cushion consumers against high tariffs and volatile fuel prices. Agriculture and allied activities formed the second-largest category, driven by spending on fertilisers, irrigation, seeds and other farm inputs.
Balancing Welfare with Long-Term Capital Growth
While subsidies play a critical role in protecting vulnerable sections and supporting priority sectors, auditors and economists warn they add to fiscal rigidity. Alongside salaries, pensions and interest payments, subsidies constitute a large share of committed expenditure, leaving states with limited flexibility to respond to economic shocks or scale up growth-oriented spending.
Significant inter-state variation persists. A few states account for a disproportionate share of total subsidies, with some spending more than 10% of their revenue expenditure on such support, while several others keep subsidy outgo below 2%. Differences in political choices, power sector structures and farm support policies largely explain this divergence.
As states grapple with elevated debt and deficit levels, the focus is shifting from the size of subsidies to their quality, with growing calls to improve targeting, curb leakages and redirect savings toward productive capital expenditure without weakening social protection.