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Budget 2023: Can The Government Contain Its Subsidy Bill?

A reduction in the subsidy bill is expected to drive fiscal consolidation in FY24.

<div class="paragraphs"><p>Source: Unsplash</p></div>
Source: Unsplash

The central government had to step up expenditure on subsidies in the ongoing fiscal. However, it is likely to rationalise this spending next year to help bring down the fiscal deficit.

This expenditure, which soared in 2020-21, has remained higher than the pre-pandemic levels. And it also rose as the Pradhan Mantri Garib Kalyan Yojana or PMGKY was extended and higher gas and input prices increased the outgo on fertiliser subsidy.

Expenditure on food, fertilisers and petroleum is the government's largest revenue expense after interest payments. Together, the government has budgeted to spend an estimated Rs 3.2 lakh crore on these items in FY23 — about a 39.2% increase over the pre-Covid year of FY20 and 26.6% below the last fiscal.

During the year, however, the government has had to further step up commitments towards providing free food grains. The government also increased the amount of fertiliser subsidy it provides amid rising prices.

  • The government has already spent Rs 1.5 lakh crore on food subsidy, about 71% of it's budget estimate up to November.

  • It has spent Rs 54,000 crore on nutrient-based fertiliser subsidies, about 129% of its budget allocation, and Rs 0.98 lakh crore on urea subsidies, about 154% of the budget estimate, up to November.

The total outgo for major subsidies has risen to Rs 3.0 lakh crore in April-September, about 94.7% of the budget estimate, compared with Rs 2.3 lakh crore a year earlier (51.7%), according to Aditi Nayar, chief economist at ICRA Ltd.

That was primarily led by 133% annual expansion in fertiliser subsidy, owing to the surge in input costs and supply disruptions, Nayar said. In contrast, the subsidy outgo towards fuel recorded a muted growth of 2.8% annually, while that for food declined 10% during the first nine months and is reflected in the lower wheat procurement bill, she said.

In December last year, the government discontinued the free food programme and instead decided to provide free food grains under the existing public distribution system, rolling it out from Jan. 1.

As such, the integrated scheme is expected to lead to a lower outgo on food subsidies, helping revenue expenditure to rise by a relatively muted 2.8% in FY24, according to Nayar's estimates.

The government's effort to rationalise subsidies by taking a difficult, but an inevitable step of discontinuing the Covid-era free grain distribution scheme will generate incremental fiscal savings of Rs 1 lakh crore, according to QuantEco Research.

While the subsidy bill is nevertheless projected to remain elevated in FY24, at around Rs 4.8 lakh crore, normalised to GDP, this would tantamount to 1.6% in FY24, down from an estimated level of 2.1% in FY23, and marginally higher than the pre-Covid five-year average of 1.4%, according to estimates by QuantEco Research.

If Russia-Ukraine conflict shows signs of diffusion, then it would help lower international fertiliser prices, moderating the subsidy bill to an extent, it added.

Lower Subsidy Bill To Drive Fiscal Consolidation

The budget math and the extent of the fiscal consolidation would depend on factors such as the market-driven level of fertiliser subsidy, savings from discontinuation of the erstwhile Pradhan Mantri Garib Kalyan Ann Yojana and the level of budgeted capex as well as disinvestment receipts, Nayar said in the note.

Goldman Sachs expects narrowing of fiscal deficit. According to its Jan. 9 note, "We expect the government to consolidate the fiscal deficit to 5.9% of GDP in FY24, fully funded by a reduction in subsidy spending, while maintaining capex and other current spending."

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