High food subsidy hurts growth

However, after 1999 there has been a creeping increase in subsidies, with food, fertiliser and petroleum subsidies rising. The ratio of subsidies to government expenditure has creeped close to double digit level hitting 9.5% in 2002-03. According to Budget estimates for 2003-04, this year will see a similar level being maintained despite a reduction in fertiliser subsidy. The share of food subsidy, incurred on account of mounting food stocks, in total subsidies has gone up from an average of around 40% in the period 1995 to 2000, to a whopping 56% in 2001-02, 54% in 2002-03 and is estimated at 55% in 2003-04.

The welfare gains of a rising food subsidy bill, occasioned mainly by rising minimum support price for foodgrain, have been questioned in a study by economists Kirit Parikh, Ganesh Kumar and Gangadhar Darbha (‘Growth and Welfare Consequences of Rise in Minimum Support Price’, Economic and Political Weekly, March 1, 2003).

Economists suggest that rising MSP has contributed to rising output at higher prices and thereby necessitated accumulation of stocks which impose both a fiscal burden and contribute to growth loss. The rising subsidy bill has contributed to lower capital expenditure and thereby lowered investment rate in the economy, and agricultural sector in particular.