Forbes India 15th Anniversary Special

Budget 2024: Subsidies burden to get lighter

As the economy recovers from pandemic-led challenges, the government is allocating lower money to overall subsidies

Published: Feb 2, 2024 05:53:38 PM IST
Updated: Feb 2, 2024 05:59:37 PM IST

Budget 2024: Subsidies burden to get lighterMajor subsidies which include food, fertiliser, and petroleum are top contributors to revenue expenditures. Image: Shutterstock

Even with one eye on the general elections in a few months from now, the interim Budget stayed away from adding more sops in the kitty. There was an expectation to push rural consumption as farm output faces challenges like poor weather conditions, fallout of climate change and steep inflationary pressures.  In contrast, the total subsidy bill is projected to get lower in the financial year 2025, show interim Budget estimates.

Major subsidies which include food, fertiliser, and petroleum are top contributors to revenue expenditures. Overall, subsidy allocation is budgeted to be lower by 7 percent in FY25 aided by moderation in fertiliser subsidy. Outlay towards subsidy is budgeted to moderate to 1.2 percent of GDP in FY25 nearing close to the pre-pandemic levels.

“The normalisation of pandemic-era spending continues. The pandemic had driven an increase in revenue expenditure, led by a bloated subsidy bill and higher rural spends (especially on employment-generating, asset-creating schemes) as the government provided support to alleviate the impact of income loss and unemployment caused by the lockdown,” says Crisil.

Over the past two years, with robust domestic economic recovery, the government tilted towards capex to support growth. However, with rural incomes and demand facing challenges due to weather shocks, some support has been restored next fiscal. “Hence the compression in the revenue expenditure ratio is lesser compared with this fiscal,” it adds.

Major subsidies at Rs 3.81 lakh crore form roughly 10.4 percent of revenue expenditure in budgeted estimates in 2024-25.  This compares to Rs 4.14 lakh crore in FY24.

The major subsidies as percent of GDP are expected to decline from 1.4 percent in revised estimates of FY24 to 1.2 percent in FY25, budget documents show.

However, the food subsidy allocation is revised higher to Rs 2.12 lakh crore in FY24 due to the extension of the free foodgrain programme Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and payment of write-off accrued under the erstwhile ‘Food for Work Programme’. Likewise, upward revision (in FY24) in fertiliser subsidy is to protect the farmers from the negative effects of an increase in global fertiliser prices. The PMGKAY is a food security welfare scheme announced by the Government of India on March 26, 2020, during the pandemic in India.

Outlay towards major subsidies which are food and fertiliser (90 percent share) will decline by 3.3 percent and 13.2 percent respectively in FY25. Fertiliser subsidies are budgeted at Rs 1.63 lakh crore.

Allocation to the Department of Fertilisers declined 13 percent in fiscal 2025 over fiscal 2024 (revised estimates). While urea subsidy allocation has declined 7 percent over fiscal 2024, nutrient-based subsidy (NBS) witnessed a significant decline of 25 percent for the same period.

Also read: Interim Budget 2024: Reimagining, one more time

For the sectors such as Defence, MGNREGA, Jal Jeevan Mission and PM-Kisan the outlay for FY25 stays unchanged with the revised estimates of FY24. However, outlay for schemes such as health and PM-Awas Yojana has been higher in FY25 against FY24.

“The government has indicated a modest rise of 3.2 percent in its revenue expenditure in FY2025 benefitting from a 7.8 percent decline in the allocation towards major subsidies mainly led by the fertiliser subsidy (13.2 percent lower). Simultaneously, the government has raised the outlay for capital expenditure by a healthy 16.9 percent to Rs 11.1 trillion in FY2025, led by fresh allocation for new schemes and a rise in the 50-year interest-free loans to states for capital investment,” Icra Ratings says.

The government had pegged the net cash outgo in its First Supplementary Demand for Grants (1st SDG) for FY2024 at a moderate Rs 58,380 crore, largely dominated by fertiliser and food subsidies, expenditure towards defence services, and for transferring an amount towards the Guarantee Redemption Fund. Subsequently, revenue expenditure has been revised upwards by Rs 0.4 lakh crore to Rs 35.4 lakh crore in FY2024 in revised estimates from the budgeted estimates of Rs 35 lakh crore, driven by an upward revision in all major subsidies in FY2024, relative to the budgeted level.

As per the provisional data released by the CGA, the outgo for major subsidies declined by 21 percent YoY to Rs 2.8 lakh crore in nine months of FY2024 (66.9 percent of FY2024 RE) from Rs 3.5 lakh crore in the same period last fiscal. “Given these trends, the government has implicitly estimated the allocation for major subsidies to contract by 24.3 percent YoY to Rs 1.4 lakh crore in Q4 FY2024 led by the contraction in fertilisers (-31.8 percent) and food (-25.4 percent) subsidies,” Icra estimates.