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Economy

Budget 2015: Watch How Subsidies Have Eaten Up Our Government Spending

We welcome the Budget 2015 series with a post on Subsidies. The government pays for many things for us:

  • Food: The government buys food and lets it rot in large warehouses (which it also pays to build)
  • Oil: You pay less at the petrol pump because the government pays the oil companies for the losses they make for billing you lesser.
  • Fertilizer: The government pays the fertilizer companies so as to keep prices low for farmers.

These are of course the main subsidies, but there are probably umpteen more. For instance when Air India need a Rs. 40,000 cr. rescue, it’s not called a subsidy, even though in effect, it is one. When farmers refuse to pay loans and the government pays it for them, it’s called a “waiver”, not a subsidy. When a big corporate demands a tax write off before investment, that’s not a subsidy, that’s just business. When IT companies don’t pay taxes for 10 years, that’s not a subsidy because darn it we say so.

If you take only what they call subsidies and then map the data out from 1971, as a percentage of the total government expenditure, you sit and wonder a little. Before 1992 we were nearly communist in nature. You would have thought everything is subsidized. But this is totally wrong:

image

Even with the current levels of subsidies which according to the government are “lower”, we are higher than any time before liberalization.

About 1/6th of all government spends is on subsidies, at 14.5% (and the 2014-15 was only an estimate)

Note: Some of this will fall naturally

If crude remains at these levels, the government’s oil subsidy bill will be substantially lower. (There is no subsidy for Diesel and Petrol anymore, only LPG and Kerosene). Food wise, the Food Security Bill will make life tougher, but we think the plan is to not really implement it much. Fertilizer is a pain, and can be huge, but we’re hoping they address it in the budget.

Getting the subsidy bill down to less than 10% of government spend will be crucial. Look at the “hockey stick” in this chart:

image

If we are to bring subsidies down to 10% of government spending (which was Rs. 18 trillion, or 18 lakh crores, last year), we will need it to come to Rs. 2 trillion (2 lakh crore). Because government expenses will go up to about Rs. 20 trillion.

That means from the current Rs. 2.6 trillion, we need it to fall to Rs. 2 trillion. That can be achieved with the drop in fuel subsidy alone (which was around Rs. 85,000 cr. last year). However, if we were to really measure subsidies both corporate and populist, we might actually be at 40%. We hope we don’t replace the saving in subsidies with “shadow” subsidies.

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