Fiscal deficit target spoils subsidy math

Written by Arup Roychoudhury | Aftab Ahmed | New Delhi | Updated: Nov 28 2013, 17:20pm hrs
Fiscal deficitOil subsidy is the biggest risk to fiscal deficit redline of 4.8% this year: FinMin (Reuters)
Subsidies have been a spending item where the practice has been to revise the original budget estimates substantially upwards to meet the rising demand, but this year, things could be different.

While the difference between the budget estimate (BE) and the revised estimate (RE) on the three major subsidies oil, food and fertiliser was a whopping Rs 68,300 crore in FY13, this could be as low as Rs 10,000-20,000 crore this fiscal, officials indicate.

Even this moderate revision is likely to be solely on account of oil subsidies, as the BEs on fertiliser and food subsidies would hardly see a change. Last year, the BEs on fertiliser, oil and food subsidies were revised from Rs 60,974 crore, Rs 43,580 crore, and Rs 75,000 crore to Rs 65,974 crore, Rs 96,880 crore and Rs 85,000 crore, respectively.

Overall subsidy payments, including other explicit subsidies, were revised to Rs 2,57,654 from Rs 1,90,015 crore initially budgeted, up Rs 67,639 crore. The under-recoveries of oil marketing companies this fiscal is estimated to be around Rs 1.4 lakh crore as against Rs 1.6 lakh crore in FY13.

Of course, to keep the BEs the same as RE in case of food and fertiliser subsidies, the government will need to roll over large amounts payable this year for settlement next year.

This is evident from the fact that the amounts released so far have been largely used up to pay arrears. The Food Corporation of India burdened with high grain stocks cost and fertiliser industry impacted by the rising cost of raw materials and finished products imports have estimated the subsidies this year to be much higher than the BEs.

However, the government, bound by the decision not to cross the "red-line" of 4.8% fiscal deficit for FY14, is not in a position to pay Rs 35,000 crore over the budgeted amount of Rs 65,971 crore that is being demanded by the fertilizer ministry under the supplementary demand for grants.

The fertlizer industry was expecting finance minister P Chidambaram to seek Parliament's approval for supplementary demand for grants in the winter session for the additional subsidy requirement.

"Oil subsidy is the biggest risk to fiscal deficit redline of 4.8% this year," a finance ministry official. "More or less fertilizer and food subsidy should be around the budgeted amount set in February and would only see only a minor change," the official added.

The government is caught in a tight position as the gross revenue receipts so far has just been 36.9% of the Rs 10 lakh crore the government had estimated in the annual budget in February, which is below the 5-year average of 44%. The government revised its oil subsidy expenses by over 35% to Rs 96,880 crore last year.

Under recoveries tend to be huge (despite the diesel and LPG pricing reform). But the 4.8% fiscal deficit target is sacred and everything else would be adjusted to meet the target, an official said.

Chidambaram's had expected in May to cap the under recoveries of OMCs to Rs 80,000 crore in FY14 counting on deregulation of prices of petroleum products. The deregulation of prices announced in January 2013 was offset by a sharp fall in the rupee against the dollar.

According to the petroleum ministry, every dollar increase in crude oil prices will add Rs 4,000 crore to the overall under recovery, while every one-rupee fall against the dollar will increase it by Rs 8,000 crore. So far, the government has paid out Rs 45,000 crore to oil companies and Rs 32,000 crore of this was towards making good under-recoveries incurred by OMCs in the last few months of last year. There is a usual delay of 90-180 days in the release of subsidy dues in the oil sector. Now the government is left with just Rs 20,000 crore from the budgeted oil subsidy.

As against the budgeted fertiliser subsidy of Rs 65,791 crore for FY14, the government has disbursed Rs 31,500 crore to the fertiliser manufacturers so far this fiscal, and this has been used up mainly to pay up the arrears.