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28 JUNE, 2017 (MAINS)



Q1.  “The impact of growing subsidy has a direct bearing on the economy in general and fiscal deficit in particular.” Examine the statement, keeping in mind the recent reforms on the policy of food, fuel and fertilizer subsidies. (200 words)


Please write the answer in comments section

  • Osho Korde

    • Subsidy is a transfer of money from the government to an entity. It leads to a fall in the price of the subsidized product.
    • India, like other developing economies, grants substantial subsidies to the people. Subsidy has remained as an integral component of budget estimates of the Central Government and State Governments since 1951.
    • The Central Government, currently, has an allocation of more than 12 percent of its total expenditure for various subsidies. This amounts to about ₹ 2.56 lakh crore annually.
    • Whereby, new subsidies are extended which pile up on older ones and they soon consume scarce revenue resources of government. This takes a heavy toll on other expenditure of the government. They are forced to cut allocation to developmental and infrastructure avenues. Further, higher subsidy expenditure pushes up fiscal and revenue deficits as government starts spending more than it earns. This fiscal deficit can be closed preferably by raising more revenue through new taxes (proactively) or by borrowing money.
    1. The share of food subsidy to the explicit subsidy has declined, the outstanding food subsidy bill continued to increase.
    2. The study identifies that fertiliser consumption, in India, has increased rapidly but domestic fertilizer production did not increase proportionately.
    3. Increasing under recovery of the Oil Marketing Companies (OMCs) was the major reason for rising fuel subsidy.

    For India, ‘minimum subsidy and maximum economic efficiency’ should be the key for future fiscal policies.