Subsidies play a pivotal role in shaping India’s socio-economic landscape. However, the prevailing scenario of elevated subsidy levels in various states, particularly non-merit subsidies driven by competitive politics, raises concerns about fiscal sustainability. Analyzing this situation and considering the imperatives of a rationalized subsidy regime becomes crucial to address these challenges.


  • Elevated Subsidy Levels and Fiscal Challenges:
    • States like Chhattisgarh, Punjab, Rajasthan, Karnataka, and Bihar have maintained high subsidy levels relative to their Gross State Domestic Product (GSDP) during FY19-FY22.
    • Punjab, despite being heavily indebted, ranks prominently in both percentages of GSDP subsidy and absolute subsidy during this period.
  • Non-Merit Subsidies and Populist Policies:
    • Non-merit subsidies extend beyond essential areas like food, education, and health, driven by populist policies.
    • These subsidies lack a direct correlation between social and private benefits, straining fiscal resources and leading to inefficiencies.
  • Rationalizing Subsidies:
    • High non-merit subsidies, particularly those by states, have been estimated to account for 4.1% of India’s GDP, potentially liberating up to 6% of GDP if streamlined.
    • This adjustment can create substantial fiscal space equivalent to the entire fiscal deficit of both Central and state governments.
  • Unsustainable Competitive Politics and Fiscal Situation: The practice of pre-election subsidy announcements is jeopardizing fiscal stability in states like Uttar Pradesh, leading to adverse consequences on fiscal deficit and outstanding liabilities.
  • Hoarding and Distorted Allocation: Inefficient distribution of subsidies, like fertilizers, disproportionately benefits larger landholders rather than targeted small and marginal farmers, exacerbating inequality.
  • Unsustainability of Subsidy-Driven Agriculture: The Dalwai Committee on Doubling Farmers’ Income underscores the non-sustainability of agriculture driven solely by subsidies, contributing to irrational resource use, such as groundwater.
  • Shift towards Public Investment: Over time, public investments in agriculture have declined while input subsidies have increased, necessitating a revaluation of the subsidy regime’s effectiveness.

Optimizing Resource Allocation for Sustainable Growth:

  • Redirecting funds from non-merit subsidies towards agricultural research, infrastructural development, and other growth-oriented investments can yield significantly higher returns.
  • Investment in agricultural research, for instance, has shown the potential to lift more people out of poverty compared to conventional power subsidies.

The prevailing situation of elevated non-merit subsidies and their adverse impact on fiscal health necessitates urgent attention. By embracing a rationalized subsidy regime and channelling resources into productive avenues like agricultural research and infrastructural development, India can attain sustainable growth, alleviate poverty, and ensure the long-term prosperity of its agricultural sector. This transformative step can steer the nation toward a more resilient and equitable economic trajectory.

Legacy Editor Changed status to publish March 13, 2024