India must rationalize food and fertilizer subsidies to maintain fiscal discipline and avoid a severe macroeconomic crisis like 1991.
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Read all about: Rationalization of Agriculture Subsidies l Factors Behind Government Subsidy Bill Surge |
Background: Why Were Reforms Introduced?
Balance of Payments (BoP) Deficit: Government faces BoP deficit due to decades of excess reliance on imports and swelling fiscal deficits.
External Geopolitical Shocks: The Gulf War spikes global crude oil prices, while the collapse of the USSR disrupts India's major export markets.
Depleted Forex Reserves: Foreign exchange reserves dry up to a critical level, leaving the nation with barely enough funds to finance three weeks of essential imports.
Sovereign Default Risk: Government pledges 67 tons of gold reserves to the Bank of England and Union Bank of Switzerland to secure an emergency $7 billion loan and avoid defaulting on international obligations.
Major Reforms
Currency Devaluation: Reserve Bank of India (RBI) devalues the rupee by 9% and then an additional 11% to drastically boost export competitiveness.
Economic Liberalization: Government dismantles the restrictive License Raj, abolishes industrial licensing, and opens up state-owned enterprises to foreign participation.
Structural Adjustments: India accepts World Bank and IMF conditions to structurally integrate its domestic economy with global markets and trade systems.
Outcomes of 1991 Reforms
Positive:
Limitations:
Unsustainable Subsidy Burden: Government spends exorbitant amounts on food, fertilizer, and fuel subsidies, budgeting Rs 4.10 lakh crore for FY27, which restricts capital for infrastructure and research.
Severe Energy Import Vulnerability: India relies on foreign markets for 90% of its crude oil, 50% of natural gas, and 23% of coal, heavily exposing the economy to Middle East conflicts and global price shocks.
Structural Fiscal Imbalance: Massive government interest payments consume approximately 26% of total central expenditure and 40% of revenue receipts, limiting discretionary fiscal space.
Agricultural Distress: Highly subsidized urea distorts consumption patterns (shifting the N:P:K ratio to a toxic 8:3:1 instead of the optimal 4:2:1), degrading 75% of Indian soils and depleting organic carbon.
Tax Rationalization
Government reforms the tax structure by the Goods and Services Tax (GST) and lowering corporate tax rates to a globally competitive 22%.
Labor Codes Implementation
State enforces labor codes to simplify compliance, safeguard worker rights, and boost formalization in the manufacturing sector.
Targeted Direct Benefit Transfers (DBT)
Government leverages the JAM (Jan Dhan-Aadhaar-Mobile) trinity to transfer subsidies directly to bank accounts, attempting to curb leakages in LPG and agricultural cash schemes like PM-Kisan.
Nutrient Based Subsidy (NBS)
Government decontrols Phosphatic and Potassic (P&K) fertilizer prices and introduces a fixed subsidy based on nutrient content to encourage balanced use.
Neem-coating of Urea
Government makes neem-coating of urea mandatory to prevent the illegal diversion of subsidized agricultural urea to industrial users like plywood and chemical manufacturers.
Agricultural & Subsidy Rationalization
Shift the entire fertilizer subsidy regime into a Direct Benefit Transfer (DBT) system paid directly into farmers' accounts on a per-acre basis, integrating it with the PM-Kisan database.
Decontrol urea prices entirely or bring urea under the Nutrient-Based Subsidy (NBS) framework to eliminate smuggling and fix the distorted soil nutrient ratio.
If total price decontrol is unfeasible, the state must impose strict quantitative restrictions on fertilizer purchases, capping the number of subsidized bags based on a farmer's verified landholding size.
Decanalize urea imports by placing them under an Open General License (OGL), empowering private importers to respond to domestic shortages and secure competitive global prices.
Food Security Reforms
Reduce PMGKAY free food coverage to align welfare with actual multidimensional poverty estimates.
Shift focus from basic cereal distribution to nutritional security, offering cash transfers or food coupons that allow vulnerable citizens to purchase protein-rich pulses, milk, and eggs.
Power & Energy Sector Overhaul
Phase out and eliminate power cross-subsidies for manufacturing and the railways to reduce national logistics costs.
Abandon indirect DISCOM bailouts and shift to meter-linked e-rupee vouchers (DBT) to deliver power subsidies directly and transparently to eligible consumers.
Redirect recurring agricultural power subsidies into one-time capital investments, pushing the solarization of agricultural feeders under the PM-KUSUM scheme.
India must shift from risk-averse, entitlement-based subsidies to structural supply-side reforms to shield the economy from global geopolitical shocks and ensure sustainable long-term growth.
Source: INDIANEXPRESS
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PRACTICE QUESTION Q. Evaluate the macroeconomic similarities and divergences between the 1991 balance of payments crisis and the current economic pressures induced by West Asian geopolitical shocks. 150 words |
The government targets a fiscal deficit of 4.3% of GDP for 2026-27, down from the revised estimate of 4.4% in 2025-26. This aligns with the medium-term strategy to reach a debt-to-GDP ratio of 50±1% by 2030-31.
The escalating geopolitical conflict in West Asia has severely disrupted the Strait of Hormuz, doubling global energy and fertilizer costs. This dynamic pressures India's trade balance and triggers heavy foreign portfolio investment outflows, mirroring the oil shock of the 1991 Gulf War.
Because the government subsidizes up to 90% of urea's cost, farmers overuse it, shifting the optimal 4:2:1 N:P:K nutrient ratio to as much as 10:2:1 in some states. This depletes soil organic carbon, pollutes groundwater with nitrates, and releases nitrous oxide, a potent greenhouse gas.
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