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Business News/ Politics / Policy/  Modi just got another reason to rationalize subsidies: boosting GDP growth
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Modi just got another reason to rationalize subsidies: boosting GDP growth

Subsidy outgo in the June quarter was substantially higher than in the same quarter a year ago, driving down net indirect taxes and GDP growth

A slightly different measurement of economic activity, gross value added (GVA), showed the economy picked up by 7.3% in the June quarter from 7.2% a year ago. Photo: BloombergPremium
A slightly different measurement of economic activity, gross value added (GVA), showed the economy picked up by 7.3% in the June quarter from 7.2% a year ago.
Photo: Bloomberg

New Delhi: Data released by the Central Statistics Office (CSO) on Wednesday showed India’s gross domestic product (GDP) slowed to 7.1% in the three months ended June from 7.5% in the same quarter a year ago.

However, a slightly different measurement of economic activity, gross value added (GVA), showed the economy picked up by 7.3% in the June quarter from 7.2% a year ago.

GDP is arrived at by adding net indirect taxes to GVA. Net indirect taxes is calculated by deducting subsidies from gross indirect tax collections.

While GDP shows the overall distributable income generated in the economy, GVA is a measure of production activity. The GDP makes India’s economic growth comparable with those of other economies. However, companies look at the GVA more seriously as it better reflects economic activity in each sector. The Reserve Bank of India (RBI), in fact, makes economic growth projections based on GVA, even though the Central government makes only GDP growth forecasts, complicating matters further.

So in the quarter ending 30 June, growth as measured by GVA (7.3%) came higher than as measured by GDP (7.1%).

Also Read: India’s GDP grows at 7.1% in Q1 FY17, slowest pace in six quarters

This means subsidy outgo in the quarter was substantially higher than in the same quarter a year ago, driving down net indirect taxes and GDP growth.

Indirect tax collection jumped 30.8% to 2 trillion during the quarter, mostly due to increase in excise duty on petroleum products and imposition of Swachh Bharat cess and Krishi Kalyan cess.

In a late evening press statement, the finance ministry admitted as much. “The lower growth in Q1 of 2016-17 compared to same quarter last year is attributable to increase in subsidies by 53% which has resulted in lower growth of net indirect taxes," it said.

An analysis of the Controller General of Accounts data for the June quarter suggests non-Plan expenditure on food, fertilizer and petroleum ministries, most of which is subsidies, jumped by around 50% in the quarter. These three segments account for most of the subsidies offered by the government.

While the government has eliminated petrol and diesel subsidies and has started marginally increasing kerosene prices, petroleum subsidy is still a substantial amount, at 27,000 crore allocated for 2016-17, mostly due to cooking gas. This, despite the government capping subsidized LPG cylinders at 12 and that too only for those with annual income less than 10 lakh a year. Around 10 million people have also voluntarily given up their LPG subsidies responding to a campaign launched by Prime Minister Narendra Modi.

Also Read: Key takeaways from June quarter GDP numbers

A bigger subsidy burden on the exchequer is because of fertilizers. This is budgeted at 70,000 crore for 2016-17. Though the government has opted for some innovative ideas such as neem-coating subsidised urea, effectively making it unusable in the chemical industry, to which at least some it was being illegally routed, it is still struggling to contain the subsidy burden. The government is starting a trial run of a new fertilizer subsidy framework this month in eight districts for efficient utilization of fertilizers by farmers.

However, the largest burden comes from food subsidy, for which 1.3 trillion has been earmarked in the 2016-17 budget, mainly due to the implementation of the National Food Security Act (NFSA). The Act which came into force in 2013 legally entitles around two-thirds of the 1.2 billion people of the country to cheaper foodgrains through ration shops.

Containing food subsidies is the most daunting challenge for the Modi government, given the endemic nature of poverty in the country and political sensitivity attached to the subsidy. Direct benefit transfer (DBT) of food subsidy has been highly contentious, with the government, for now, largely focusing on weeding out bogus beneficiaries through digitization of ration cards and the public distribution system.

However, last September, the government started direct cash transfers of food subsidies to Aadhaar-linked bank accounts of beneficiaries in all Union territories except Delhi. Food minister Ram Vilas Paswan has urged states to adopt DBT for food subsidy in urban areas, but not many have heeded his call.

While boosting consumption and investment demand is key to growing the economy, a keen focus on the subsidy outgo and better subsidy targeting will also add to the effort.

Every bit helps.

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Published: 01 Sep 2016, 10:54 AM IST
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