Governments should move away from universal subsidies towards tightly targeted transfers, backed by stricter eligibility norms, sunset clauses and periodic audits to curb leakages and improve spending efficiency, a joint study by Asian Development Bank and PwC has recommended.
Submitted to the 16th Finance Commission, the report argues that sharper targeting, greater transparency and stronger accountability are essential to improve the quality of public expenditure while safeguarding fiscal stability.
The study calls for a sharper pivot in India’s subsidy regime, from standardising what qualifies as a subsidy to phasing out universal benefits. It urges both the Centre and states to strengthen Aadhaar-linked targeting and mandate ex ante and ex post impact assessments before rolling out new schemes.
Mapping subsidies and transfers by the Centre and 21 large states, the report estimates them at 7-10 per cent of public expenditure. Central subsidies are reported to have peaked in the post-Covid period at 2.7 per cent of gross domestic product (GDP) in 2022-23 before declining to 1.7 per cent in 2024-25 (revised estimates). At the state level, subsidy spending rose steadily from 2.1 per cent of GSDP in 2017-18 to 3 per cent in 2024-25.
“The aggregate subsidies are large enough to affect fiscal outcomes. At the central level, rising subsidies on account of the pandemic is associated with increases in the fiscal deficit. At the state level, there is a strong positive correlation with the revenue deficit, suggesting that states with higher subsidies also have wider revenue deficits,” according to the study titled A Study of Subsidies and Transfers in India. It reckons that higher subsidy allocations at the state level can crowd out development-oriented spending.
For states, electricity, financial assistance, pensions and subsistence support, and food together account for 68 per cent of total subsidies across the 21 states covered.
“At the central level, food and fertilizer have persistently been the top subsidies, accounting for more than 70 per cent of total central government subsidies,” the study states.
A key concern highlighted is weak targeting. Electricity subsidies often prove regressive and consumption-oriented, with high-consumption households receiving free units in states such as Punjab and Tamil Nadu, according to Household Consumption Expenditure Survey data.
Financial assistance schemes vary widely in design, with some narrowly targeted and others universal. Food subsidies also show signs of leakage, with a portion of benefits accruing to higher-spending households, particularly in relatively wealthier states.
Against this backdrop, the study recommends expanding Aadhaar-linked direct benefit transfer systems across more schemes to reduce duplication and leakages.
Performance-based options, such as conditional cash transfers for example, Janani Suraksha Yojana, are urged by the study to ensure efficiency. “This approach ensures that subsidies are used efficiently and effectively to achieve tangible economic and social benefits. By aligning subsidies with measurable economic goals, this strategy ensures that public funds are used effectively to drive tangible benefits,” it adds.
The study also urges the 16th Finance Commission to focus on large subsidy heads such as electricity by incentivising power sector reforms to reduce losses, and to propose an integrated social security framework for the informal sector with contributory elements and government support to ensure affordability.
