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.
- 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.