Subsidies and Fiscal Deficit in Post Reforms India

Abstract

The Government of India has been subsidising various economic goods, mainly food, fertiliser and petroleum. It is argued that subsidies are responsible for persistent high fiscal deficit over the years. The present paper attempts to study the trend of major subsidies given by the Government of India, and then examines whether all the forms of subsidies are uniformly responsible for fiscal deficit or otherwise. Based on annual time series data from 1992-93 to 2012-13, the study observes that in the post-reforms period, food and fertiliser subsidies have grown at a sharper rate than petroleum subsidies. The regression results also confirm that food and fertiliser subsidies have a positive and significant impact on fiscal deficit. The analysis of petroleum subsidies is more complicated. If we see only the explicit subsidies for petroleum products, then their rise is not significant over the post-reforms period, except for 2008-12. However, when we include the under-recoveries of Oil Marketing Companies (OMCs), the story of petroleum subsidies becomes completely different. While the effectiveness of subsidies vis-à-vis their fiscal burden need a detailed scrutiny, the present paper argues for a National Policy on Subsidies.