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Subsidies – A contrararian view

May 5, 2000

The recent days have been one of trial and tribulation for the finance minister, who has been defending the subsidy cut proposed by him in the Union Budget for FY01. With the passage of the finance bill it is now evident that the minister’s efforts have been rewarded. But, if we may ask, at what cost?

(Rs bn) Subsidy GDP Subsidy/GDP
FY94 127 8,770 1.45%
FY95 129 10,378 1.24%
FY96 134 12,180 1.10%
FY97 164 14,098 1.16%
FY98 195 15,636 1.25%
FY99 247 17,746 1.39%
FY00RE 238 19,500 1.22%
FY01BE 228 21,818 1.05%

India's explicit subsidy bill is a meager 1% of Gross Domestic Product (GDP) and has stayed so since FY94. Infact there has been a substantial decline during this year. In a country where poverty estimates range from 34% (official) to 50%, the allocation seems to be rather small. By the way, the country’s defence expenditure is proposed at 2.7% of GDP in FY01 (BE)!

Okay, the government will come out and say that they incur a huge ‘hidden’ subsidy bill, which would take the overall ratio to over 10% of GDP. That's interesting because although the numbers may say so, why has the government failed to capitalise on the issue. It is probably due to the fact that they too are not sure where the ‘hidden’ subsidies go!

Just to put things in perspective the government’s expenditure as a percentage of GDP has been put at 3.4% of GDP in the World Development Report. Singapore, which has more or less achieved cent percent literacy levels, spends 3% of GDP. The implications are clear. The government needs to do more on its part for atleast the poor.

There is a case to cut down the subsidy bill in order to improve the financial health of the country. But despite the fact that the subsidy bill has been slashed over the years, the domestic fiscal deficit has remained stubbornly at high levels. Maybe the government should look at its administrative expenditure, which has grown over 230% between FY94 and FY01 (BE). There is a need for the government to clean its back yard before giving ‘bhashan’ on fiscal prudence.

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