23 Feb 2016 20:32 IST

Varying approaches to food, fuel subsidies

While the Centre has proactively tried to cut fuel subsidies, burgeoning food subsidies must be cut

The NDA’s 2015 Budget was expected to take forward its vaunted reform agenda. However, it was met with mixed reactions. While it did present reforms meant to revitalise the economy, it did so in the form of several incremental changes rather than a few big-ticket measures.

Unfortunately, Parliamentary deadlocks in 2015 stymied major reforms. The loss of the Bihar elections further eroded the NDA’s political capital. Therefore, several reforms in the last year were aimed at increasing the functional efficiency of government machinery.

Perhaps the most significant set of government policies that can benefit from process-oriented changes are those related to subsidies. This article compares and contrasts the NDA’s approach to fuel vis-à-vis food subsidies.

Systemic overhaul

The NDA government has been fairly proactive in reducing the Centre’s fuel subsidy bill, plugging leakages and streamlining benefits to those most in need of them. At ₹30,000 crore, the targeted fuel subsidy for 2015-16 was 50.22 per cent lower than the ₹60,270 crore fuel subsidy allocation for 2014-15. The reduction can be attributed to both a fall in crude prices and significant policy measures.

After deregulating petroleum and diesel prices in its first year, the NDA introduced the PAHAL Direct Benefit Transfer (DBT) for LPG in the form of the PAHAL Scheme in January 2015. In just seven months, 139 million users joined the scheme. In August 2015, PAHAL entered record books as the largest cash transfer scheme in the world. The Centre claims that the switch to DBT alone will save the exchequer ₹15,000 crore annually by plugging leakages. Riding on the success of the PAHAL Scheme, on January 1 this year, the Centre announced DBT for kerosene with effect from April 1.

The switch to DBT and a concomitant reduction in the fuel subsidy budget by the NDA marked one of the few occasions where a policy change was implemented with such alacrity. It is expected that the Centre’s fuel subsidy target in the FY2017 budget will be 33 per cent lower as a direct consequence of these measures.

Ballooning subsidies

At ₹1,24,000 crore, food subsidies constituted a lion’s share of the ₹2,27,000 crore subsidy allocated under the 2015-16 budget. Unlike fuel subsidies, however, the food subsidy bill has been increasing significantly every year — up 298 per cent over the last decade. The public distribution system (PDS) has been a chronic source of distress. The previous UPA government increased the burden on an inefficient PDS by enacting the ambitious National Food Security Act (NFSA) in 2013. The result: a larger food subsidy bill with even greater leakages.

Of the ₹1,24,000 crore allocated for food subsidies in FY2016, ₹65,000 crore was apportioned for subsidies under the NFSA. Media reports indicate that the Budget may allocate a whopping ₹1,30,000 crore to just food subsidies linked to NFSA, i.e. double the allocation for FY2016.

By proposing such an enormous increase in budgetary allocation without fixing the PDS, the NDA government will commit the same mistake the UPA did with NFSA. Moreover, any further surge in the food subsidies bill will jeopardise the Finance Minister’s fiscal deficit target, inhibiting greater public investment in infrastructure.

The time is right for the Centre to take an unequivocal stance on its commitment to augmenting India’s subsidy mileage, and fuel cannot be the only driver.