Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

How government can fund a growth revival

Rationalizing ‘non-merit’ subsidies could free up fiscal space up to 6% of GDP, shows a new study

MUMBAI : With the economic slump deepening, pressure for a government stimulus package is mounting. The government’s ability to loosen its purse strings, though, is constrained by a limited budget. Against this backdrop, a new study suggests that there is scope for the government to massively free up fiscal space by cutting back on India’s unwarranted ‘non-merit’ subsidies.

In a National Institute of Public Finance and Policy paper, Sudipto Mundle and Satadru Sikdar show that though the subsidy bill is lower today than it was 30 years ago, it still amounts to over 10% of India’s gross domestic product (GDP). And within this, over half goes to ‘non-merit subsidies’ which has no public interest rationale behind them. Non-merit subsidies are all the additional subsidies central and state governments provide beyond ‘merit subsidies’ for food, education and health.

The authors estimate non-merit subsidies amount to 5.7% of India’s GDP with the bulk of this subsidy amount (4.1% of GDP) provided by states. They suggest just rolling back these non-merit subsidies could free up fiscal space up to 6% of GDP which is equivalent to the entire fiscal deficit of both central and state governments.

Beyond non-merit subsidies, cutting tax exemptions and concessions could bump up revenues by another 5% of GDP.

A recent Comptroller and Auditor General report on central government accounts also revealed that around 1.5% of GDP worth of central government expenditure has been approved for spending in the budget but not actually spent. The authors argue there could be similar excess appropriations at state governments. Addressing this in addition to rationalizing non-merit subsidies and cutting tax exemptions could generate fiscal space worth 12% of GDP.

Also read: Subsidies, Merit Goods and the Fiscal Space for Reviving Growth: An Aspect of Public Expenditure in India

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