Govt allocates Tk1.22 lakh crore for subsidies, incentives despite fiscal strain

Despite pressure from weak revenue collection, rising debt-servicing costs and other economic challenges, the government has proposed allocating over Tk1.22 lakh crore for subsidies and incentives in the 2026-27 fiscal year budget.

According to budget documents, Tk89,538 crore has been earmarked for subsidies and Tk32,955 crore for incentives.

Economists say the spending is necessary to contain inflation, maintain energy supplies and support agricultural production. However, they warn that such a large allocation could put further pressure on public finances.

The power sector will receive the largest share of subsidies, with Tk37,000 crore. Another Tk9,798 crore has been allocated for food subsidies, while Tk42,740 crore has been earmarked for other sectors, including natural gas.

To reduce the subsidy burden sustainably, the government needs to lower capacity payments in the power sector and reduce system losses.

Towfiqul Islam Khan, additional director of CPD

On the incentive side, agriculture will receive Tk17,000 crore, unchanged from the current fiscal year. Export incentives have been proposed at Tk8,825 crore, slightly lower than the Tk9,025 crore allocated in FY26. Incentives for remittances and jute products have been set at Tk7,200 crore.

In FY26, the government allocated Tk88,920 crore for subsidies but later it was increased by Tk 95,031 crore in the revised budget. Compared with the revised figure, the proposed subsidy allocation represents a reduction.

Towfiqul Islam Khan, additional director (research) of CPD, told TBS that the International Monetary Fund had recommended reducing subsidies.

"Although the government has exited the IMF programme, there remains a possibility that it may seek IMF support again in the future. As a result, the government is trying to gradually reduce subsidies. Another reason is that revenue collection is not sufficient to sustain such large subsidy expenditures. In some cases, the government resorts to load shedding to reduce subsidy costs," he said.

Towfiqul also said that the subsidy outlook would largely depend on whether power generation costs and gas import costs increase, both of which are influenced by global geopolitical developments and conflicts.

"To reduce the subsidy burden sustainably, the government needs to lower capacity payments in the power sector and reduce system losses," he added.

The government has had to spend more on subsidies in recent years because of higher fuel import costs, foreign exchange shortages and rising power generation expenses. Financial support has regularly been required to cover deficits at the power and other energy-sector entities.

Economists argue that reducing subsidies remains difficult amid persistent inflation. Higher prices of food, electricity, gas and agricultural inputs continue to increase living costs, particularly for low- and middle-income households. A sharp reduction in government support could further fuel inflationary pressures.

At the same time, sustaining large subsidies poses fiscal risks. The government has set a revenue collection target of Tk695,000 crore for FY27, but revenue mobilisation has consistently fallen short of targets in recent years.