Subsidies under Modi 2.0: A Shift in Fiscal Priorities

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January 29, 2024

Subsidies under Modi 2.0: A Shift in Fiscal Priorities

• The second term of the Narendra Modi government, known as Modi 2.0, has witnessed a notable departure from the fiscal policies observed during Modi 1.0. The initial phase of Modi’s governance saw a focus on “new welfarism,” marked by a reduction in major subsidies related to food, fertilizers, and fuel. However, recent developments, including the impact of Covid-19, the Russia-Ukraine war, and impending elections, have led to a resurgence of subsidies and transfers.
Modi 1.0: New Welfarism and Subsidy Rationalization
• During Modi 1.0 (2014-15 to 2018-19), the government introduced various schemes to ensure universal access to essential services. Despite increased public funding for these initiatives, major subsidies, particularly in the realms of food, fertilizers, and fuel, experienced a significant reduction. The subsidy bill fell both in absolute terms and relative to GDP, reflecting a period of fiscal consolidation.
Subsidies under Modi 2.0: The Reversal
• Contrary to the trend observed in Modi 1.0, the second term has seen a resurgence in major subsidies. The subsidy-to-GDP ratio, which had dropped to 1% in 2018-19, soared to 3.6% in 2020-21. While the figures have slightly decreased to 1.9% and 2.5% in 2022-23, they remain comparable to the levels at the beginning of Modi’s tenure.
• In absolute terms, the subsidies for food, fertilizers, and fuel peaked at Rs 707,707 crore in 2020-21, more than twice the levels of 2018-19. Even in 2022-23, they stood at Rs 530,959 crore, signifying a substantial increase.
Drivers of Modi 1.0 Subsidy Reduction
• The subsidy reduction during Modi 1.0 was primarily attributed to favorable international oil and fertilizer prices. The government capitalized on lower crude prices by not fully passing on the benefits to consumers. Instead, it increased excise duties on fuel, turning diesel and petrol into significant revenue sources. Similar tactics were employed in the fertilizer sector, where cost savings were not passed on to farmers.
Drivers of Modi 2.0 Subsidy Surge
• Two key drivers have led to the escalation of subsidies in Modi 2.0. Firstly, a policy decision was made to fully fund the food and fertilizer subsidy, resulting in a spike in the overall subsidy tab in 2020-21. Secondly, the Covid-19 pandemic and the Russia-Ukraine war contributed to increased expenditure. The pandemic necessitated higher spending on the public distribution system and MNREGA, while the war impacted international fertilizer prices, doubling the fertilizer subsidy.
The Road Ahead
• As we look ahead, the article suggests that the maximum retail price of urea, PDS issue prices for essential commodities, and fuel prices are unlikely to see significant changes. The focus may shift towards potential increases in direct benefit transfers under schemes like PM-Kisan.
• In conclusion, Modi 2.0 marks a departure from the subsidy rationalization witnessed in Modi 1.0, with external factors like the pandemic and geopolitical events driving a surge in government expenditures. The road ahead hints at a continuation of certain price norms, while any substantial rationalization of subsidies might be deferred to the next government.

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Subsidies under Modi 2.0: A Shift in Fiscal Priorities | Vaid ICS Institute