ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Subsidies, Merit Goods and the Fiscal Space for Reviving Growth

The incidence of implicit and explicit budget subsidies provided by the central and state governments has declined from about 12.9% of the gross domestic product in 1987–88 to 10.3% at present, with the bulk of these subsidies being provided by the states and about half being spent on non-merit subsidies. This paper argues that rationalisng non-merit subsidies is one of several deep fiscal reform measures that could together free up massive fiscal space that can be used to finance an inclusive growth revival strategy.

India is an economy chronically under fiscal stress. The tax to gross domestic product (GDP) ratio has remained below 18% (central plus state governments),1 while expenditure has progressively increased to 29% of GDP.2 Large fiscal deficits and even larger public sector borrowing requirements (PSBR) remain a chronic problem.3 In this context, the high incidence of budget subsidies—the unrecovered cost of publicly provided private services—has always been an important
policy concern.

In a paper published in 1991, Mundle and Rao estimated the total volume of explicit and implicit budget subsidies for the central and state governments at 14.4% in 1987–88.4 Several estimates of subsidies were published subsequently by their colleagues at the National Institute of Public Finance and Policy (NIPFP). Though these were conceptually similar to the Mundle–Rao estimates, they were not strictly comparable and coverage varied from an all-India estimate to estimates for the central government to estimates for selected states.5 Responding to persistent demands for replicating the original Mundle–Rao estimate, we have now estimated implicit and explicit budget subsidies for the years 1987–88, 2011–12 and 2015–16.

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Updated On : 31st Jan, 2020

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