A recent joint study by the Asian Development Bank (ADB) and PwC has delivered a clear message to India’s 16th Finance Commission: the era of universal subsidies must yield to a regime of tightly targeted transfers. This isn't merely an administrative tweak; it's a fundamental re-evaluation of how public funds are deployed, urging a shift towards greater fiscal efficiency and accountability.
The study, A Study of Subsidies and Transfers in India, maps the extensive landscape of central and state subsidies, estimating them to consume a significant 7-10 percent of public expenditure. This is not a trivial sum. Central subsidies, though declining from a post-Covid peak of 2.7 percent of GDP in 2022-23 to a revised estimate of 1.7 percent in 2024-25, still represent a substantial outlay. More critically, state-level subsidy spending has shown a steady ascent, from 2.1 percent of GSDP in 2017-18 to 3 percent in 2024-25.
The implications for fiscal health are direct and concerning. At the central level, the report draws a clear line between rising subsidies and increases in the fiscal deficit. For states, the correlation is even starker: a strong positive link between higher subsidies and wider revenue deficits. This isn't just about balancing books; it’s about the opportunity cost. Higher subsidy allocations at the state level are actively crowding out development-oriented spending, diverting resources from long-term growth drivers to short-term consumption support.
The Targeting Conundrum
The core of the problem, as identified, lies in weak targeting. This isn't a new observation, but the study provides fresh data points underscoring its persistence and impact. Electricity subsidies, for instance, are frequently regressive, with high-consumption households in states like Punjab and Tamil Nadu often receiving free units. This isn't just inefficient; it’s an inversion of equity, where those who need it least benefit most, often at the expense of fiscal stability and the power sector's own viability.
Food subsidies, a cornerstone of welfare, also exhibit leakages. A portion of these benefits, the study notes, accrues to higher-spending households, particularly in relatively wealthier states. This suggests a systemic friction where the intended recipients are not the sole beneficiaries, diluting the impact of public spending and raising questions about the efficacy of distribution mechanisms. Financial assistance schemes, too, present a mixed picture, ranging from narrowly targeted to broadly universal, often without clear sunset clauses or robust ex-ante and ex-post impact assessments. The lack of standardized eligibility norms and periodic audits further exacerbates these issues, creating an environment ripe for inefficiency and unintended consequences. This is the structural challenge that needs addressing: how to deliver support without creating perverse incentives or draining the public purse through a sieve-like distribution system. The political economy of these universal benefits, once established, makes their retraction difficult, yet the fiscal imperative is undeniable. The study’s call for a sharper pivot from standardizing what qualifies as a subsidy to actively phasing out universal benefits is a recognition of this deep-seated challenge. It’s a move from merely accounting for subsidies to fundamentally redesigning their purpose and delivery.
“This wasn’t about growth. It was about expectations, and the cost of meeting them universally.”
The recommendations are straightforward, if politically challenging. Expanding Aadhaar-linked direct benefit transfer (DBT) systems across more schemes is paramount. This isn't just about digitalizing payments; it’s about establishing a verifiable, auditable trail that can reduce duplication and minimize leakages. The success of existing DBT models, such as conditional cash transfers like the Janani Suraksha Yojana, offers a template. This performance-based approach ensures that subsidies are tied to measurable economic and social benefits, aligning public funds with tangible outcomes rather than simply disbursing them.
The 16th Finance Commission is urged to take a focused approach on large subsidy heads. Electricity, given its significant share in state subsidies, is a prime candidate. Incentivizing power sector reforms to reduce losses is crucial, moving beyond mere consumption subsidies to addressing the underlying structural inefficiencies. Furthermore, the study advocates for an integrated social security framework for the informal sector, incorporating contributory elements alongside government support to ensure both affordability and sustainability. This acknowledges the vast segment of the workforce often left vulnerable, while also building a more robust, shared responsibility model.
The message is clear: fiscal stability and efficient public expenditure are not mutually exclusive with welfare. They are interdependent. The path forward demands a disciplined approach to public spending, one that prioritizes impact over universality and accountability over broad-brush distribution. This will inevitably pressure state governments, accustomed to using subsidies as a political tool, to rethink their fiscal strategies. It will also require the Centre to maintain a consistent policy stance, resisting the temptation to revert to universal schemes under pressure. The long-term health of India’s public finances, and its capacity for sustained development, hinges on this shift.
It's a necessary recalibration.
