Budget 2024: Can the government bite the bullet on subsidies?

All eyes will be on Finance Minister Nirmala Sitharaman’s budget speech on 1 February 2024 amid the speculations of a hike in allocations for government subsidies. Food and fertiliser subsidies constitute the major components of government spending on subsidies. In an election year, as the Finance Minister would present an Interim Budget, subsidy schemes could be in focus.

In the last Budget, the reduction in allocations for subsidy schemes caught the attention of all. This year, the speculations are high as a few reports indicate that the government may increase the allocations compared to the previous Budget. Subsidies are defined as a sum of money granted by the state to help an industry or business keep the price of a commodity or service low to help maintain demand. For example, a 50kg bag of DAP (diammonium phosphate) fertiliser costs around ₹3,850. But, farmers get the same bag at ₹1,350 as the government provides ₹2,500 by way of subsidy. This proves highly beneficial both for the farmer as well as the fertiliser maker, but shifts the financial burden on the state.

There are two types of subsidy schemes run in India – central sector schemes and centrally sponsored schemes. While central sector schemes are fully funded by the Centre, centrally sponsored schemes are implemented by the state governments, but majorly funded by the central government.

Over the years, the government of India has not only consolidated the total number of such schemes, but also significantly reduced allocation towards them.

Reduced allocation for subsidies in Budget 2023 In Union Budget 2023, the overall allocation for all subsidy schemes was reduced to ₹4.03 lakh crore for FY 2023-24, which was ₹1.59 lakh crore less than the previous year’s budget estimate of ₹5.62 lakh crore.

The major reductions were in the food and fertiliser subsidies, which also get the biggest chunk of allocations. The government last year cut the budget for food subsidy to ₹1.97 lakh crore for 2023-24. This was 31% lower than the revised budget estimate for food subsidy of ₹2.87 lakh crore for 2022-23.

Similarly, the Union Budget 2023 allocated ₹1.75 lakh crore for fertiliser subsidies for 2023-24. This was much lower compared to the revised budgetary estimate of ₹2.25 lakh crore for the sector for 2022-23.

Higher allocation expected for subsidies in Budget 2024 This year, the buzz is that the government may allocate about ₹4 lakh crore for food and fertiliser subsidies for FY 2024-25 compared to ₹3.72 lakh crore allocated in the preceding fiscal.

According to a Reuters report, the ministry of consumer affairs, food and public distribution has estimated next year’s food subsidy bill at ₹2.2 lakh crore, while fertiliser subsidy is expected to be ₹1.75 lakh crore.

The food subsidy bill is likely to increase as the government extended its flagship free food welfare programme under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) for a period of five years with effect from 1 January, 2024.

PMGKAY is among the world’s biggest social welfare schemes aimed at ensuring food and nutrition security for 81.35 crore people at an estimated cost of ₹11.80 lakh crore over a five-year period.

The extension of such a large-scale scheme indicates that the government is prepared to bear the burden of higher subsidies at least for the next few years.

Besides food and fertilisers, focus would also be on the LPG subsidy given to the poor that was reduced by 75% in the last budget.

In Union Budget 2023, the allocation for the scheme was reduced to ₹2,257 crore for 2023-24 compared with revised estimate of ₹9,170 crore for 2022-23. However, this number may go up now as the government in October 2023 raised the subsidy amount for Pradhan Mantri Ujjwala Yojana beneficiaries from ₹200 per LPG cylinder to ₹300 ahead of the assembly polls in five states.

As the country now prepares for general elections to be held in the next few months, it would be interesting to see how the Interim Budget balances between subsidies and fiscal discipline to avoid any major upset.