How high the Centre’s subsidy bill could go this year

Source: The post is based on the article “How high the Centre’s subsidy bill could go this year” published in Indian Express on 12th December 2022

What is the News?

The Central Government has sought Parliament’s approval for fresh expenditure of Rs 2.14 lakh crore towards major subsidies, over and above the Rs 3.17 lakh crore budgeted for 2022-23.

This 5.32 lakh crore spending on subsidy in 2022-23 would be the second highest after the Rs 7 lakh crore of 2020-21. However, there’s a difference between 2020-21 and 2022-23.

What happened in 2020-21?

In 2020-21, the spike in subsidies was on account of the Finance Minister making a one-time provision to clear all dues to the Food Corporation of India (FCI) and fertilizer companies.

In previous years, the Centre wasn’t providing full funds for subsidies arising from these entities selling grain and fertilizers at below cost to PDS (public distribution system) consumers and farmers respectively. 

Not wholly funding the difference and on time forced them to borrow, with FCI alone availing loans from the National Small Savings Fund(NSSF) at 7.4-8.8% interest during 2016-17 to 2019-20.

What is different in 2022-23?

The overshooting of subsidies in 2022-23 has been largely courtesy of Covid-19 and the Russia-Ukraine war.

The pandemic resulted in a record offtake of rice and wheat through the PDS under various welfare schemes notably the free-grain Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).

In fertilizer and petroleum, the higher subsidy outgo has been due to surge in global prices – from September-October 2021 and, more so, after the Russian invasion of Ukraine.

What are the future prospects of subsidies?

Some relief can be expected on all the “3F” subsidies – food, fuel and fertilizer.

In food, the government is unlikely to extend PMGKAY beyond December 2022. This will help reduce the Centre’s food subsidy bill.

In fuel, international prices of petrol and diesel have eased. There is also a reduction in the prices of imported fertilizers.

Due to these positive future prospects, there could be subsidy savings of around Rs 150,000 crore assuming no new geopolitical, climate or pandemic shocks.