Subsidies & Expenditure Rationalisation: Subsidy rationalisation without adequate social protection can undermine inclusive growth." Discuss in the context of India's budgetary priorities.

Question

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Introduction:

Subsidy rationalisation is essential for fiscal consolidation, but without adequate social protection it can weaken inclusivity and demand in an unequal economy like India.

Body:

India’s recent budgets reflect efforts to contain subsidies at ~6 paise per rupee through better targeting (DBT in LPG, food) and reduced fuel subsidies. This improves efficiency and frees resources for capital expenditure. However, many subsidies—food (PDS), fertiliser, and power—serve as implicit income support for low-income households and farmers. Abrupt rationalisation, especially amid inflation or rural distress, can reduce real incomes, worsen food and nutritional security, and depress consumption demand—undermining growth itself.

Moreover, structural issues persist. The labour market is characterised by informality and weak social security nets; thus, subsidies often substitute for missing welfare systems. Under-provisioning or delayed payments (e.g., fertiliser dues) can shift burdens onto farmers, affecting productivity. While DBT improves targeting, exclusion errors due to digital or identification gaps can leave out the most vulnerable. Hence, fiscal savings achieved through subsidy cuts may come at the cost of equity and human development outcomes.

A balanced approach requires recalibrating rather than compressing subsidies. This includes strengthening social protection (cash transfers, health insurance), ensuring portability and inclusion in welfare schemes, and aligning subsidies with productivity (e.g., nutrient-based fertiliser support, direct income support to farmers).

Conclusion:

Sustainable fiscal reform lies in combining efficient subsidy design with robust social protection, ensuring that consolidation does not compromise inclusive growth or human welfare.

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