Budget 2023: Taking the knife to food, fertiliser subsidies

Food, fertiliser and petroleum subsidies in 2023-24 have been reduced by almost 28.2% to Rs 3.74 lakh crore from the revised Rs 5.21 lakh crore in 2022-23. The reduction is in line with lower fiscal deficit as the government focuses on macroeconomic stability amid global turbulence.

The subsidy bill had risen in FY23 from a budgeted Rs 3.17 lakh crore due to a rise in global commodity prices and the extension of the free food programme. FY24 fiscal deficit is seen at 5.9% of the GDP against 6.4% estimated in the current fiscal.

“The government met its FY23 fiscal deficit target (of 6.4% of GDP), as expected, as higher tax revenues and nominal GDP growth offset the surge in subsidy and other spending,” said Sonal Varma, Nomura’s chief economist for India and Asia outside of Japan. However, subsidies in FY23 were 64% higher than the budget estimate as the government had to step up support in the form of free food grains and fertiliser subsidies amid higher commodity inflation.

Economists said the government is on the path of withdrawal of exceptional support that was provided earlier through and post the Covid-19 pandemic period. “Hence, the free food scheme has been merged with PDS, bringing about savings in the subsidy bill. Also, fertiliser subsidy was upped as price in the global market had increased. With prices correcting, this need has come down,” said Bank of Baroda chief economist Madan Sabnavis.
FY24 urea subsidy has been cut to Rs 1.31 lakh crore from Rs 1.54 lakh crore in FY23, while the allocation for nutrient-based subsidy is down 38% to Rs 44,000 crore.

Aditi Nayar, chief economist at ICRA, said the decline in the allocations for FY24 are broadly in line with expectation, following the cooling of input prices and the discontinuation of the Pradhan Mantri Garib Kalyan Ann Yojana and its integration with the National Food Security Act.

The budget follows a turbulent year for India’s fiscal dynamics, where a surge in subsidies due to the Russia-Ukraine conflict was offset by higher tax collections. The government has slowly but steadily been withdrawing pandemic-related emergency measures to add to fiscal sustainability over the medium term. While revenue expenditure is expected to be broadly flat amid a falling subsidy bill, capital expenditure growth remains the key priority, growing by over 33% from prior budget estimates for FY23, according to Rahul Bajoria, MD & head of EM Asia (ex-China) economics at Barclays.