Rationalising subsidy payments

The colossal volume of state subsidies, including incentives, alongside interest payments due to borrowings, constitutes a substantial portion of the national budget. In the previous fiscal year (FY2022-23), these expenditures accounted for over 36 per cent of the budget. Although this year's targets are set lower, the trend in government revenue suggests a probable overshooting of these goals.
Expenditure on incentives extended particularly to remittances, exports, and agricultural machinery has been steadily rising. While this drains the national exchequer, these subsidies are aimed at yielding benefits. For instance, incentivising remittances aims to deter the use of illegal channels like the hundi system. Similarly, export incentives are intended to stimulate trade, while subsidies for agricultural inputs aim to reduce farmers' production costs.
Tax exemptions and duty rebates also fall under the umbrella of subsidies and incentives, causing substantial revenue loss for the government. While these incentives have shown positive outcomes, questions often arise about the disparity between subsidy spending and its actual returns.
Addressing this issue involves curbing the misuse of subsidy funds. Allegations abound that subsidies meant for exports or agricultural inputs end up in the wrong hands, undermining their intended impact. The authorities need to take serious measures to ensure proper utilisation of subsidies and incentives.
Recent revenue shortfalls have made it challenging for the government to meet recurring expenses. To alleviate borrowing costs and facilitate private sector funding, the government initially turned to high-powered money but had to backtrack due to inflation concerns. Consequently, it returned to traditional borrowing methods via treasury bills and bonds, which now offer higher yields than bank interest rates.
The acute fund crisis has hindered the government's ability to make subsidy payments across sectors. To tackle this, the Ministry of Finance is reportedly contemplating issuing special bonds to banks, offering attractive yield rates, to fund these subsidies. Resolving banks' liquidity issues could involve categorising these bonds as SLR (statutory liquidity reserve) by the central bank.
For sustainable subsidy management, policymakers must gauge the economy's capacity to afford subsidies and curb misuse. Such actions could reduce the dependence on funds for subsidies and incentivise more efficient disbursement. Rigorous assessments of subsidy outcomes should inform future programmes for more effective and efficient subsidy disbursement. However, one can hardly pin hope on any change in ground realities as far as subsidies are concerned. A section of policymakers are oblivious of the need for reducing the same to a rational level. The situation calls for a change in their attitude to help save wastage of resources that could be spent for some useful purposes.
In our economy, providing subsidies and incentives is essential to drive better performance across various sectors. However, it's imperative for policymakers to understand the fiscal capacity and prevent misuse of these financial aids.
[email protected]