The Hindu Business Line : New strains on the fisc

The good economist that he is, Dr Manmohan Singh is worried about the rising subsidy burden on the exchequer and its implications for social sector expenditure. Like the better Prime Minister he is, he hedged his view by underscoring the need to ensure leakages are plugged and those subsides reach the needy. At a Planning Commission meet this week, the Prime Minister said nothing the nation has not heard a thousand times already. But in the context of the recent build-up i n new strains on the fisc, the concerns about subsidies are appropriate; though the ways they ought to be addressed are not.

In its mid-term review the Reserve Bank of India coyly noted that the finances of the Central government “appeared to be under some strain during April-August 2007” on account of upswings in interest payments and subsidies. At the Planning Commission meet, the reference point for the subsidy burden was clearly the oil price climb toward triple digits and the impact on subsides. The RBI’s concern about subsidies predates the recent oil price hike; which means that the pressures on the fiscal had begun even when the average Indian crude price was within manageable limits. What the RBI does not mention is that the interest payments that have added to the pressures are those emanating from its dollar mop-up operations since early this year. Just halfway through the current fiscal, the annual limits set for Market Stabilisation Scheme (MSS) bonds had been exceeded by around Rs 20,000 crore. As a result, the government has had to top up its interest outgo; and given the strong surge in dollar inflows, the government can expect more strains on its expenditure in order to manage prices.

Fertiliser subsidies are another headache. While bonds will help take such subsidies off the budget, interest payments of 9-10 per cent will have to be borne by the government; the same applies to oil bonds that have kept oil prices down. Some policymakers are now suggesting prices be allowed to drift upwards. With the WPI-based inflation at around 3 per cent, some spike in oil prices may not hurt the organised sector. But with food prices over 7 per cent for the rural and urban poor, any oil price hike will add to their woes. With elections round the corner, talk of reducing subsidies will remain just that; as for oil prices, New Delhi will gamble on the crude price falling once it hits $100 a barrel. Alternatively, domestic prices may be raised along with a rash of social sector spends as if to mitigate their baneful effects. What that will do for food inflation is anybody’s guess.

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