Make fiscal subsidies easy to monitor at every level of government
Summary
- India’s central government has worked at fiscal transparency, but its states have a long way to go. Address problems of definitional ambiguity, off-budget financing and deferred payments for better governance.
Despite fiscal constraints and rising opportunity costs, election campaigns in India remain significantly dominated by promises of freebies, cash transfers and subsidies. This makes transparency in subsidy spending more critical than ever.
However, accountability remains elusive, given the country’s lack of good-quality and timely data on the actual subsidy expenditure of states. This makes it difficult to distinguish between justifiable welfare measures and politically motivated giveaways. The Comptroller and Auditor General has consistently underscored the need for such differentiation, but this requires a fundamental improvement in Indian subsidy reporting practices. India faces three key challenges in this context.
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Definitional ambiguity: The absence of a standard, universally accepted definition of ‘subsidy’ allows states significant leeway in determining what to include or exclude under that head, highlighting the urgent need for a uniform framework.
Freebies, tax rebates, cash transfers and implicit subsidies are often selectively omitted or included, making comparisons difficult. For instance, Tamil Nadu’s Vidiyal Payanam Scheme, which offers free bus rides for women, is classified as a subsidy, while a similar scheme in Punjab does not feature in its subsidy statement. Such inconsistencies arise across virtually all states.
Odisha stands out as the only state that has consistently reported implicit subsidy burdens since 2009-10. Despite discussions on standardizing definitions, no uniform approach has been successfully implemented, leaving room for misclassification and opacity.
Off-budget financing: A second issue arises from the use of off-budget mechanisms to finance subsidy programmes, effectively bypassing scrutiny. For example, Andhra Pradesh reported a subsidy expenditure of just 0.5% of its gross state domestic product (GSDP) in 2022-23. However, like many other states, its extra-budgetary burden was many times higher, primarily driven by liabilities incurred by state public enterprises managing food and power subsidies. This practice conceals potentially significant liabilities, thereby risking financial credibility and debt sustainability.
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Deferred payments: India’s cash-based accounting system enables governments to defer subsidy payments and obscure the true cost of subsidy programmes. Deferred payments shift current burdens to future budgets, while present payments may represent settlements of past deferrals.
The power sector is a stark example of this practice. States frequently defer payments to distribution companies for subsidized electricity. Between 2009-10 and 2020-21, unpaid subsidy reimbursements across Indian states totalled ₹74,000 crore. Of this, ₹27,000 crore was cleared in the subsequent two years, highlighting how deferred payments can skew fiscal data, place additional burdens on future administrations and complicate inter-temporal analyses of states’ fiscal health.
These three challenges—definitional ambiguity, off-budget financing and deferred payments—have far-reaching consequences for fiscal governance and transparency. Together, they also hinder India’s ability to align itself with international financial reporting standards, a key requirement under the G20 Data Gaps Initiative.
Emerging reforms and the road ahead: Recent central government reforms signal progress towards greater fiscal transparency, serving as a model for states. Since 2019-20, the Centre has published its off-budget borrowings, while 2023-24 saw the release of a consolidated document on state-reported borrowings. Notable steps by the Union government include the discontinuance of off-budget financing and the use of bond issuances in place of past cash subsidies.
These national-level reforms must now extend to all Indian states so that the country as a whole can sustain the central government’s momentum on improved accountability of fiscal spending.
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As India aims to leverage “data for development," it is vital to establish accurate and comparable subsidy reporting systems for evidence-based policymaking and ensuring that public funds are deployed effectively.
Lessons from Odisha’s consistent record of reporting implicit subsidies and the Centre’s transparency reforms should serve as templates for state-level action. India should align its statistics with internationally comparable data on government finances. This would enable economic analysts to examine consolidated government data without the worry of state-level input distortions.
India’s subsidy framework is at a critical juncture. Without addressing definitional ambiguities, off-budget financing and deferred payment practices, fiscal opacity and inefficiency will persist, limiting the country’s ability to fund critical investments in health, education and infrastructure.
By adopting standardized, tech-enabled and internationally accepted reporting mechanisms, India can build a more transparent subsidy system and strengthen its fiscal governance. Accurate, timely and comparable data across all levels of government will not only enhance fiscal discipline, but also enable the Indian state to maximize the delivery of value for taxpayers’ money. As fiscal pressures remain and public scrutiny grows, this shift is now a necessity.
The authors are, respectively, distinguished fellow at the Centre for Social and Economic Progress (CSEP) and former member of the 15th Finance Commission; research associate at CSEP; and research analyst at CSEP.
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