CEIC Data Blog

India’s Union Budget – Tracking the Subsidies

 

India Data Talk: The Indian government announced the Union Budget on 16 March 2012. The revised estimates show that total subsidy expenditures for the fiscal year 2012 ending in March rose by 24.7% to reach INR 2.2 trillion, versus INR 1.7 trillion and 22.7% year-on-year (YoY) growth recorded in fiscal year 2011. However, the budget estimates for the upcoming fiscal year reveal a 12.2% cut to INR 1.9 trillion.

Where are the Subsidies Going?India Subsidies
Chart provided by: CEIC

The increase in subsidy expenditures in fiscal year 2011 was largely because of significant growth in such major subsidy components as petroleum and food, which amounted to INR 383.7 billion and INR 638.4 billion, respectively. Food price subsidies rose by 9.2% during the fiscal year 2011 and were estimated to increase by 14.1% during fiscal year 2012. Of greater concern, petroleum subsidies have been growing at an alarming rate since fiscal year 2010 – showing a 156.7% jump in fiscal year 2011 and a projected 78.5% growth in fiscal year 2012.

The Indian government saw increasing pressure to clamp down on subsidies, as its fiscal deficit stood at INR 3.74 trillion in fiscal year 2011 and was estimated to have grown to INR 5.22 trillion in fiscal year 2012. Moreover, this pressure intensified as revenue receipts are estimated to decline to INR 7.67 trillion in fiscal year 2012 from INR 7.88 trillion in the previous fiscal year. Undoubtedly, subsidy reductions will be met with strong resistance given the inherently political nature of the food component. Although the Wholesale Price Index (WPI) on food has seen significant downward pressures during the fourth quarter of 2011, the latest figures in February 2012 rebounded slightly to 192.3, showing a 6.07% YoY increase. Perhaps more worryingly, fuel price inflation has consistently hovered above the 10% mark since the second quarter of 2011 and is likely to stay at high levels in light of political turmoil in the Middle East and the general increase in crude oil prices.

As outlined in the recent Union Budget, subsidies will be closely scrutinized by the relevant monitoring bodies. Most importantly, clear fiscal targets have been set – central subsidies will be kept under 2% of the gross domestic product for fiscal year 2013 and will be brought down further to 1.75% over the next three years.

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By Chan Yee Lui – CEIC Analyst

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