No effort to rein in subsidies

In the Budget for 2012-13, then Finance Minister Pranab Mukherjee had targeted fiscal deficit at 5.1 per cent of GDP, which was subsequently revised to 5.3 per cent. P. Chidambaram has delivered; the revised estimate is 5.2 per cent. For 2013-14, he is aiming at 4.8 per cent.

However, the Government has failed to deliver on its commitment to rein in subsidies. Subsidies on fuel, fertilisers and food were budgeted at 1.9 per cent of GDP. The revised estimate is 2.26 per cent. Budget estimate for 2013-14 is even higher at 2.3 per cent.

Juxtapose this with Pranab Mukherjee’s exhortation that subsidies will be reduced progressively to 1.75 per cent within three years. Far from that, subsidies are rising. This is despite substantial under-provision in all the categories.

On fuel front

On fuel, Budget provision for 2012-13 was Rs 43,580 crore. The revised estimate is Rs 97,000 crore. That is a slippage of 125 per cent! The much-talked-about measures to control fuel subsidy came too late and too little.

In January 2013, Government increased the cap on number of subsidised LPG cylinders from six to nine. This resulted in extra outgo of about Rs 2,000 crore in the remaining part of current year.

The price of diesel was increased by 45 paise per litre. That would yield a saving of just about Rs 3,000 crore in a full year. However, for current year, the saving would be a pittance Rs 750 crore!

The real bet was on hike in price of diesel sold to bulk users viz., Defence, Railways, power plants, road transport undertakings. This was done to fully eliminate under-recovery of around Rs 9.6 per litre on sales to this segment.

This was expected to generate a saving of around Rs 3,500 crore in the remaining period of the current fiscal (Rs 14,000 crore in a full year). This plan has floundered as nearly 30-40 per cent of bulk users are buying at a subsidised price!

On the 60 per cent of bulk sales at full/unsubsidised price, savings would at best be Rs 2,000 crore. And, that gets fully neutralised by the corresponding higher outgo due to the increase in cap on LPG cylinder.

Another hike in diesel price to retail customers of 45 paise per litre — effected this month — was primarily to offset hardening of crude price (from $109 to $113). So, that won’t yield even marginal savings.

The Budget allocation for 2013-14 is Rs 65,000 crore. This is a substantial scaling down to just two-thirds of the revised estimate for current fiscal. This would be barely sufficient to cover the Government’s contribution to under-recovery on diesel alone.

At present, upstream oil PSUs viz., ONGC, OIL contribute 40 per cent of under-recovery. They are demanding reduction in their share to garner resources for their development needs. If conceded, Government will have to shell out more.

The Finance Minister may be pinning hope on the calibrated plan for increase of 45 paise in diesel price every month. Even assuming that this is executed in true spirit for the entire 12 months, he won’t get the estimated saving of Rs 32,000 crore.

This is because hikes given effect in later months will yield lesser and lesser savings. For instance, the 45 paise increase on March 1, 2014 would give only Rs 250 crore, against Rs 3,000 crore accruing from April 1, 2013 hike.

The expected saving of over Rs 30,000 crore would be possible only if the cumulative price hike Rs 5.4 per litre (12x0.45) is done from April 1, 2013. And, that seems to be politically impossible.

In view of the election fever catching up from mid-2013 onwards, the possibility of even a meagre dose being sustained beyond a couple of months is ruled out. Therefore, the overall saving would be well below Rs 10,000 crore — and that too if international prices do not rise.

Reforms on backburner

As regards fertiliser subsidy, Budget allocation for 2012-13 was Rs 60,974 crore. The revised estimate is Rs 65,974 crore. That is a meagre increase of Rs 5,000 crore leaving an uncovered gap of around Rs 35,000 crore as against likely requirements.

The Finance Minister has frozen provision for 2013-14 at the revised estimate for the current fiscal, i.e. Rs 65,971 crore. After accounting for carry forward, money available for payments next year would be only Rs 30,000 crore.

This would be barely sufficient to cover payments during the first four months of 2013-14. Thereafter, manufacturers could face ‘suspension’ in 2012-13, leading to liquidity tightness and interest loss on delayed payments.

Thus, in both fertilisers and fuel, compression in subsidy shown in Budget is the outcome of ingenious financial engineering and deferring payments — at the cost of producers — instead of any credible measures to actually rein in subsidies.

In fertilisers, all reforms viz., increase urea MRP (proposal for 10 per cent hike was rejected by the Fertiliser Minister); adoption of NBS (nutrient based scheme) for urea (mooted by GoM in early 2012) and now ‘deferring’ Direct Benefit Scheme (DBS) have been put on the backburner.

Significantly, food subsidy has received a pretty generous treatment (never mind less and less fiscal space!). Revised estimate for 2012-13 is Rs 85,000 crore which is Rs 10,000 crore higher than Budget estimate at Rs 75,000 crore.

For 2013-14, the allocation is Rs 90,000 crore. This includes Rs 80,000 crore on current basis and Rs 10,000 crore towards additional payments that might arise in case the Food Security Bill (FSA) is passed by Parliament.

The Government has ruled out bringing food subsidy under direct benefit transfer (DBT) despite the Economic Survey highlighting huge benefits. Ashok Gulati, Chairman, CACP, has estimated savings up to Rs 30,000 crore in food and fertilizer subsidy.

And yet, policymakers have preferred to bypass this major reform.

Instead, they are obsessed with FSA which, if implemented to cover the entire country, could result in a monumental food subsidy bill of Rs 200,000 crore annually for the next three years, according to Dr Gulati. That will throw all our fiscal consolidation plans haywire!!

Shorn of rhetoric, the Budget has absolutely nothing to offer in so far as subsidies — the worst enemy of ‘fiscal discipline’ — are concerned.

(The author, a policy analyst, is ex-Executive Director, CropLife India)

COMMENT NOW