Subsidy

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Trend of India subsidy bill
 

  • Subsidy is benefits given by the government to companies and citizens of India either in form of cash payment or tax reduction.
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  • Subsidy forms the part of the revenue non plan expenditure of the government and adds to the fiscal deficit.
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  • Chart below shows trend in subsidies from 1999 to 2013.
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India subsidy trend

 

  • From the above chart, we can see that India’s subsidy bill has been increasing.
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  • India’s subsidy bill has increased almost 9 times from 236bn in 1999 to 2577bn 2013 (RE).
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  • FY14 subsidy bill is budgeted at 2311bn which is 10% lower than FY13 (RE).
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  • FY13 (RE) subsidy was at 2.6% of GDP and is budgeted at 2% of GDP for FY14.
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Composition of India subsidy bill
 

  • Major components forming part of subsidy bill are food, petroleum (fuel) and fertilizer.
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  • These major subsidies accounts for more than 90% of the total subsidy.
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  • Food subsidy generally accounts for the largest share of the total subsidy. It is provided to Food corporation of India (FCI) under targeted public distribution system (TPDS), welfare schemes and maintenance of buffer stock.
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  • Fuel subsidy is in form of compensation paid by the government for the under recoveries incurred by oil marketing companies. Under recovery is the difference between international and domestic selling price of crude.
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  • Retail selling price of diesel, PDS kerosene, LPG are regulated by the government to protect summers from the full impact of crude prices.
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  • Fertilizer subsidy includes subsidy on indigenous urea, imported urea and sale of decontrolled fertilizers with concession to farmers.
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  • Chart below shows trend in % share of the major subsidies to total subsidy from 1999 to 2014(BE).
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Major subsidies as % of total subsidies

 

  • From the above chart, we can observe composition of major subsidies as % share of total subsidy has changed over the years.
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  • Fuel subsidy has formed part of India subsidy bill from 2003.
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  • Chart below shows % share break up of subsidies for FY14 (BE) of total subsidy.
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break up of subsidies

 
Effect of rupee depreciation on subsidy bill
 

  • One of the factors fuel and fertilizer subsidy bill depends on is international commodities price and exchange rate.
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  • Rupee depreciation increases cost of imported crude oil and fertilizer which will increase the subsidy bill thereby increasing fiscal deficit.
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  • India imports about 80% of its crude oil requirement. FY13 imports stood at around 3.7 million barrels per day.
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  • Its rupee cost depends on international crude oil price and exchange rate.
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  • Rupee depreciation will increase cost of imported crude oil. As the retail prices of diesel, PDS kerosene and LPG are modulated by the Government, prices are generally lower.
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  • This increases the under recoveries for oil marketing companies, thereby increasing the fuel subsidy.
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  • Petrol price is no longer regulated by the government.
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  • Similarly, rupee depreciation will increase price of imported fertilizers and increase the fertilizer subsidy burden of the government.
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  • Out of the total fertilizer subsidy of 660bn (FY13 RE), 30% is allocated to indigenous urea, 23% towards imported urea and 46% towards sale of decontrolled fertilizers with concession to farmers.

 

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