General Awareness

April 04, 2017 @ 01:15 PM

April 04, 2017 @ 01:15 PM

K. J. Somaiya Institute of Management Studies and Research, Mumbai

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Impact of Rising Subsidy Bill in India

General awareness on current topics is essential as not only you will be getting questions on GK in various MBA entrance exams but it will be useful for Essay writing test and WAT also.

 
Today, you will read General Awareness Topic: “Impact of Rising Subsidy Bill in India” 
 
Subsidy is that portion of the cost of a product or a service which is provided by the government.  In other words, difference between the market price of a product and its cost which is born by the government is subsidy.
 
Almost every country, irrespective of its level of development grants subsidy to its population in some form or the other.
 
In India, major form of subsidy is food subsidy (public distribution system), petroleum subsidy (provided in the form of reduced prices of petrol, diesel and LPG) and fertilizer subsidy. 
 
In March 2012, high crude oil prices and burgeoning fertilizer subsidies, primarily on account of imported non-urea fertilizers, made India’s subsidy bill has zoomed to Rs2.16 trillion, or 2.5 percent of the GDP. Former finance minister, Pranab Mukherjee, set an ambitious target to reduce this to under 1.75 percent of the GDP by 2015-16. 
 
Though, government targeted to bring the subsidy bill below 2 percent, however, in the current year it is likely to remain well above 2 per cent, despite the government having provided Rs 20,400 crore to finance it by raising prices of diesel and cooking gas. 
 
Recently present Finance Minister made a pitch for introducing direct cash transfer of subsidies in food, fertilisers and petroleum for the targeted population to achieve compression of government expenditure. The projected subsidy bill for current fiscal at Rs 1,90,015 crore. 
 
India imports nearly all its requirement for non-urea fertilizers, while more than two-thirds of the country’s urea requirement is produced locally.
 
 Diesel is one of the main contributors to a subsidy bill that economists warn could push the country's fiscal deficit above a target of 5.1 percent of gross domestic product. Diesel accounts for more than 40 percent of India's refined fuel consumption. 
 
It is subsidized mainly to benefit farmers but the wide gap with petrol prices has caused the 'dieselization' of the economy, with car companies launching diesel versions of popular models aimed at price-conscious middle class consumers. 
 
Meanwhile, government’s expenditure on food subsidy for the current fiscal could touch R1 lakh crore, an all-time high, due to significant rise in procurement of grains and huge stocks. 
 
The government had budgeted R74,551 crore in food subsidy for 2012-13. The government provides subsidy on indigenous as well as imported fertilizers to benefit the farmers and ensure that price of food grain remain within the reach of common man and the manufacturers get reasonable return on their investment. 
 
According to Kelkar Committee Report the fertilizer subsidy bill for fiscal year 2012-13 is expected to increase by Rs 10,000 crore in respect of the budgeted estimates. The Government has to take reform action immediately to curb this increase in subsidy bill. 
 
In current financial year FY 2012-13 the subsidy bill would reach to Rs 70,974 crore while it was estimated as Rs 60,974 crore in the budget. The cost of importing diamonium phosphate is Rs51,000 per tonne, while it is supplied to farmers at Rs9,300 per tonne. In case of urea, as against the import cost of Rs22,000 per tonne, the government is supplying to farmers at Rs4,830 per tonne.
 
The overall subsidy bill consumed  nearly Rs 2 lakh crore is unsustainable for the country as it puts pressure on the rising fiscal deficit of the country. Government is taking measures to put a cap on the subsidy bill like recent increase in the prices of LPG, diesel etc.
 
Moreover, subsidy reductions on non-urea fertilizers, including diammonium phosphate (DAP) and muriate of potash (MoP), would ensure the total fertilizer subsidy bill is capped around the Rs60,974 crore that has been budgeted for 2012-13. 
 
It is believed that subsidies are necessary to provide a safety net to poor and vulnerable sections of the population, therefore, no one is opposing them food or fertilizer subsidy in the country. 
 
However, if that much of subsidy is provided, it must also be ensured that it reaches the designated section and is not becomes one more tool of corruption. In order to ensure that beneficiary of food subsidy remain the poor one and plug the pilferage of food grains from the PDS, government is considering a coupon system by which it will directly transfer the cash to the poor. 
 
Thus, the reforms in pipeline are moves in the right direction, but they must come out of pipe now as country urgently needs a new set of reforms to put it back on the path of high growth.       
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