Challenges in reporting subsidies and fiscal transparency

Source: The post Challenges in reporting subsidies and fiscal transparency has been created, based on the article “Fiscal subsidies should be easy to monitor at every level” published in “Live Mint” on 20 March 2025. Challenges in reporting subsidies and fiscal transparency.

UPSC Syllabus Topic: GS Paper2-Polity-Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes;

Context: Election campaigns in India continue to focus heavily on freebies, cash transfers, and subsidies despite fiscal constraints and rising opportunity costs. This makes transparency in subsidy spending crucial. However, the lack of high-quality, timely data on state subsidy expenditures hampers accountability and prevents differentiation between necessary welfare measures and politically motivated giveaways. The Comptroller and Auditor General (CAG) has repeatedly stressed the need for clear classification, but major challenges persist in India’s subsidy reporting.

For detailed information on Subsidy Rationalization in Indian States read this article here

Key Challenges in Subsidy Reporting

1. Definitional Ambiguity: There is no standard definition of ‘subsidy,’ leading to inconsistent reporting. For example, Tamil Nadu’s Vidiyal Payanam scheme (free bus rides for women) is classified as a subsidy, while a similar scheme in Punjab is not. Odisha is the only state consistently reporting implicit subsidies since 2009-10. This lack of uniformity leads to misclassification and opacity.
2. Off-Budget Financing: States often use off-budget mechanisms to fund subsidies, concealing actual liabilities. Andhra Pradesh reported a subsidy expenditure of just 0.5% of its Gross State Domestic Product (GSDP) in 2022-23, but its real burden was much higher due to liabilities incurred by state enterprises managing food and power subsidies. This practice distorts fiscal sustainability and transparency.
3. Deferred Payments: India’s cash-based accounting system enables states to defer subsidy payments, shifting financial burdens to future budgets. A key example is the power sector, where unpaid subsidy reimbursements across states amounted to ₹74,000 crore between 2009-10 and 2020-21, with ₹27,000 crore cleared in the next two years. This practice masks the true cost of subsidies and complicates financial planning.

Impact on Fiscal Governance

1. Lack of Fiscal Transparency: Different welfare schemes are reported inconsistently, making financial comparisons unreliable.
2. Hidden Debt Risks: Off-budget financing masks actual liabilities, increasing debt risks.
3. Distorted Fiscal Data: Deferred payments create fiscal imbalances, making long-term planning difficult.
4. Non-Compliance with Global Standards: These challenges prevent India from meeting G20 Data Gaps Initiative requirements, limiting fiscal credibility.

Emerging Reforms in Fiscal Transparency

The central government has taken steps to improve fiscal reporting:

1. Since 2019-20, the Centre has published off-budget borrowings, enhancing fiscal transparency.
2. In 2023-24, a consolidated document on state borrowings was released, providing better insights into liabilities.
3. The Centre has discontinued off-budget financing, using bond issuances instead of direct cash subsidies.

Way Forward

India needs a standardized, technology-driven, and internationally accepted subsidy reporting system. Odisha’s approach to implicit subsidy reporting and the Centre’s fiscal reforms provide useful models. A transparent subsidy framework will improve fiscal discipline, ensure efficient public spending, and enhance public trust in government finances. Given increasing fiscal pressures and public scrutiny, this shift is now essential.

Question for practice:

Discuss the key challenges in subsidy reporting in India and their impact on fiscal governance.