Spending better: subsidies, DBT and budgeting innovations

Detail

1. Subsidies: meaning and types

• Subsidy: support from the government that makes a good or service cheaper for the buyer than its real cost.

• The government pays the gap between the cost price and the price charged.

• Explicit subsidies: these are shown openly in the budget as a spending line.

• Food: foodgrains sold cheaply through the PDS.
• Fertiliser: urea and other fertilisers sold below cost.
• LPG and petroleum.
• Interest subvention: the government pays part of the interest on a loan, for example on farm loans.

• Exports: support given to exporters.

• Implicit subsidies: these do not appear as a separate budget line. They are hidden in the under-pricing of public services such as education, health and power.

• Example: a government hospital charges ₹10 for a service that costs ₹500 to provide. The unrecovered ₹490 is an implicit subsidy.

2. How big are subsidies? (data)

• NCERT data (subsidies, % of GDP):

Year	% of GDP	Note
2014-15	2.02	—
2015-16	1.8	—
2018-19	1.0	—
2020-21	3.6	COVID year. The Food Corporation of India's (FCI) dues were brought on budget
2022-23 (BE)	1.2	BE = Budget Estimate

• Why 2020-21 jumped: before this, part of the food subsidy was paid through FCI borrowing, which kept it off budget (hidden from the deficit). In 2020-21 these dues were cleared through the budget. The subsidy figure rose, but the budget became more transparent.
• NCERT Table 5.1 puts major subsidies at 1.4% of GDP.
• Latest Union Budget (2026-27 BE):
• Total subsidies: ₹4,54,773 crore. This is 3.1% lower than the 2025-26 Revised Estimate [4].
• Food subsidy: ₹2,27,629 crore. Fertiliser subsidy: ₹1,70,799 crore. Together they make up 87% of the subsidy bill [4].
• LPG subsidy: only 2.6% of the subsidy bill (2026-27) [4].

• Fertiliser subsidy alone is about 3.2% of total central government spending (2026-27) [4].

• PMGKAY (Pradhan Mantri Garib Kalyan Anna Yojana): free foodgrains for NFSA beneficiaries. It was extended for five years from 1 January 2024.

• Formula: Subsidy as % of GDP = (Total subsidies ÷ GDP) × 100.
• Worked example: subsidies ₹4 lakh crore and GDP ₹350 lakh crore → (4 ÷ 350) × 100 ≈ 1.14% of GDP.

3. Subsidies in national income accounting

• The market price includes indirect taxes and has subsidies subtracted from it. The factor cost is what the producers (land, labour, capital) actually receive.
• Formula: NDP at factor cost = NDP at market prices − Indirect taxes + Subsidies.
• Subsidies are added back because the buyer paid less than the factor cost. The government paid the rest.

• Worked example: NDP at market prices = ₹1,000 crore, indirect taxes = ₹120 crore, subsidies = ₹40 crore → NDP at factor cost = 1,000 − 120 + 40 = ₹920 crore.

• See national-income-accounting for more.

4. Cash vs in-kind transfers

• In-kind transfer: the government gives goods (such as cheap rice through the PDS) instead of money.
• Cash transfer: the government pays money directly in place of subsidised goods.

• People argue that cash transfers are cheaper to run and leak less. Fewer middlemen handle the money.

• The PEO finding: the Planning Commission's Programme Evaluation Organisation (PEO) studied the "Performance Evaluation of the Targeted Public Distribution System". It found the government spent ₹3.65 to deliver ₹1 of food subsidy to the poor.

• Worked example: to put ₹100 crore of food benefit in the hands of the poor, the state spends 100 × 3.65 = ₹365 crore. About ₹265 crore is lost to storage and transport costs, leakages and diversion.

• The case for in-kind transfers: food in hand protects people from inflation. Cash can lose value when prices rise. Cash also needs a working bank or market close to the beneficiary.

5. DBT and the JAM trinity

• DBT (Direct Benefit Transfer): the government pays benefits straight into the beneficiary's bank account. It was launched on 1 January 2013.
• Cumulative DBT transfers reached about ₹53.26 lakh crore (as of September 2026) [3].
• An assessment of 2009-2024 data by the BlueKraft Digital Foundation estimated cumulative savings of ₹3.48 lakh crore from plugging leakages [2].

• The same study found that subsidies fell from 16% to 9% of total government expenditure after DBT [2].

• JAM trinity: proposed in the Economic Survey 2014-15 to deliver DBT efficiently.

• J — Jan Dhan: a bank account for every household.
• A — Aadhaar: a biometric ID that proves who the beneficiary is and removes fake names.

• M — Mobile phones: used for payment alerts and for mobile banking.

• How JAM cuts leakage:

• Aadhaar seeding removes ghost and duplicate names.
• Money goes straight to the bank, so no middleman takes a cut.

• Less leakage means the same benefit costs the budget less.

• Examples:

• LPG PAHAL: DBT for LPG. The consumer buys the cylinder at market price, and the subsidy is paid into their bank account.

• PM-KISAN: ₹6,000 a year paid to farmers.

• Pilot for food: cash transfer of the food subsidy through PDS has been tested in Chandigarh and Puducherry (since September 2015) and in urban Dadra and Nagar Haveli (since March 2016) [5].

6. Targeting errors

• Targeting: giving benefits only to people who meet the eligibility rules (for example, the poor). Every targeting system makes two kinds of error.
• Inclusion error: benefits go to ineligible people.
• Examples: ghost (non-existent) or duplicate beneficiaries, or better-off households holding BPL cards.

• Effect: public money is wasted.

• Exclusion error: eligible people are left out.

• Examples: Aadhaar authentication failures (worn fingerprints, poor internet) or outdated beneficiary lists.

• Effect: the poorest can lose welfare they are entitled to.

• Trade-off: tighter targeting cuts inclusion errors but usually raises exclusion errors. Universal schemes do the opposite.

• Worked example: 100 people are eligible and a scheme reaches 120 people. Of these, 90 are eligible and 30 are not. Inclusion error = 30 ineligible people covered. Exclusion error = 10 eligible people missed.

7. Universal Basic Income (UBI)

• UBI: an unconditional cash payment made at regular intervals to everyone. It is proposed as a replacement for many targeted subsidies.

• Unconditional means no test of income or work is needed.

• Economic Survey 2016-17:

• It costed a UBI of about ₹7,620 a year per person for 75% of the population.
• Cost: about 4.9% of GDP.

• Worked example: ₹7,620 × 1 crore people = ₹76,200 crore a year. That is the cost of covering just 1 crore people.

• Why the survey set coverage at 75%: leaving out the richest 25% keeps the cost down. It is "quasi-universal".

• Quasi-UBI schemes in states: unconditional cash schemes for groups such as farmers and women. They cover one group, not everyone.

8. Freebies

• Freebies: goods, services or cash given free by governments.
• The debate:
• Some call them productive welfare, for example free school meals or bicycles for girls, which build health and education.

• Others call them unsustainable populism, for example unconditional handouts announced close to elections, often paid for by borrowing.

• Supreme Court: a 2022 PIL by Ashwini Upadhyay asked the Court to stop parties from promising "irrational freebies".

• RBI: has warned that freebies strain state finances. Money goes to handouts instead of to capital spending.
• 16th Finance Commission: has called for rationalising unconditional cash transfers.
• The state-level angle is covered in fiscal-federalism.

9. Budgeting innovations

Approach	What it is	India milestone
Performance budget	Shows spending by functions, programmes and activities, with targets to measure performance	Recommended by the Administrative Reforms Commission (1968)
Outcome budget	Links each ministry's outlay to measurable outputs (what is produced) and outcomes (the real change that results)	2005-06. From 2017-18, an Output-Outcome Monitoring Framework with NITI Aayog's DMEO
Zero-based budgeting (ZBB)	Every item is justified again from zero. Last year's figure is not simply raised	Devised by Peter Pyhrr (1970s). Tried in India from 1986-87
Gender budgeting	Turns gender commitments into budget allocations and checks how public spending affects women	Gender Budget Statement from 2005-06, enlarged 2006-07 (NCERT footnote 5)
Green budgeting	Tags and assesses the environmental and climate impact of revenue and spending	Odisha and Bihar climate/green budgets from 2020-21. Sovereign green bonds from January 2023
Participatory budgeting	Citizens directly decide or influence part of a budget, usually a local one	Porto Alegre, Brazil (1989); Kerala People's Plan Campaign (1996); Pune

• Output vs outcome: 1,000 classrooms built is an output. A higher learning level among students is an outcome.
• ZBB vs incremental budgeting: incremental budgeting does "last year + 10%". ZBB asks "why spend anything on this at all?" It cuts dead-weight schemes, but it takes a lot of time and paperwork.

10. Gender Budget Statement (GBS): structure and data

• Structure:
• Part A: schemes that are 100% women-specific.
• Part B: schemes where 30-99% of the allocation is for women.

• Part C: schemes where less than 30% is for women. This part was added in 2024-25.

• Formula: GBS share = (GBS allocation ÷ Total Union expenditure) × 100.

• Worked example (2025-26): ₹4.49 lakh crore ÷ 8.86% → total expenditure ≈ 4.49 ÷ 0.0886 ≈ ₹50.7 lakh crore.

• 2025-26:

• GBS allocation: ₹4.49 lakh crore, which is 8.86% of the Union Budget. It was 6.8% in 2024-25 [6]. (NCERT scaffold: about 8.9%.)
• Part A: ₹1,05,535.40 crore (23.50%). Part B: ₹3,26,672 crore (72.75%). Part C: ₹16,821.28 crore (3.75%) [6].

• Reported by 49 Ministries/Departments and 5 UTs (38 and 5 in 2024-25) [6].

• 2026-27 (latest):

• GBS allocation: ₹5.01 lakh crore, up 11.55% from 2025-26. The share rose to 9.37% of the Union Budget [7].
• Part A: ₹1,07,688.42 crore (21.50%). Part B: ₹3,63,412.37 crore (72.54%). Part C: ₹29,777.94 crore (5.95%) [7].

• Reported by 53 Ministries/Departments and 5 UTs, the highest number since GBS began [7].

• Pattern: most of the money sits in Part B, which covers mixed schemes such as housing and rural jobs. Truly women-only schemes (Part A) are only about a fifth of the total.

Prelims Hooks

• DBT launch: 1 January 2013. The JAM trinity was proposed in the Economic Survey 2014-15, not the Budget speech.
• PEO (Planning Commission) TPDS study: ₹3.65 spent to deliver ₹1 of food subsidy.
• Subsidies in national accounts: NDP at FC = NDP at MP − Indirect taxes + Subsidies. Subsidies are added.
• UBI (Economic Survey 2016-17): ₹7,620 a year, 75% of the population, about 4.9% of GDP.
• Inclusion error = ineligible people get the benefit. Exclusion error = eligible people are left out. Aadhaar authentication failure is an exclusion error.
• GBS parts: A = 100% women; B = 30-99%; C = below 30% (added 2024-25). GBS share was 9.37% in 2026-27 [7].
• Zero-based budgeting: devised by Peter Pyhrr. Tried in India from 1986-87. Performance budgeting: recommended by the ARC (1968). Outcome budget: 2005-06.
• Participatory budgeting began in Porto Alegre, Brazil (1989). India's example is Kerala's People's Plan Campaign (1996).
• Food + fertiliser make up about 87% of the Union subsidy bill (2026-27 BE) [4].
• Implicit subsidy = under-priced public services (education, health, power). It is not a separate budget line.

Mains Points

• Cash vs in-kind:
• DBT and JAM cut leakages. The estimated savings are ₹3.48 lakh crore, and subsidies fell from 16% to 9% of expenditure [2].
• In-kind food still protects against inflation and suits remote areas with weak banking.

• A hybrid, choice-based model is safer than a sudden full switch.

• Targeting trade-off:

• Aadhaar-based targeting removes ghost beneficiaries (lower inclusion error).
• But it can create exclusion errors that hurt the poorest.

• Grievance redress, offline fallbacks and regular list updates are needed.

• Freebies vs welfare:

• Unconditional pre-election handouts squeeze capital spending and worsen state debt. This links to FRBM targets, RBI warnings and the 16th FC's call to rationalise cash transfers.

• Merit goods (health, nutrition, schooling) are an investment in human capital. They should not be counted as "freebies".

• Budgeting for results:

• Outcome budgets, ZBB, gender budgets and green budgets shift the focus from "how much was spent" to "what changed".
• Gaps remain. Most gender allocations sit in Part B, which weakens their precision, and green tagging is still mostly done by states.