If upstream companies ONGC, Gail India and Oil India as per convention bear 40% of this year's under-recovery of R1,40,000 crore estimated by the petroleum ministry for the fiscal, the government ought to pay about R84,000 crore to fuel retailers. This broadly corresponds with the budget allocation of R85,480 crore. However, after taking into account the R45,000 crore subsidy requirement of Q4 of 2012-13 rolled over to current fiscal, what oil marketing companies can actually account for in their books this fiscal is just R39,000 crore. That leaves about R40,480 crore of unmet subsidy liability from 2013-14 to be carried over to 2014-15. This is much higher than the payment postponement of R35,000 crore admitted by the finance minister in the interim budget.
In the wake of this, the oil subsidy allocation of R63,427 crore for 2014-15 clearly looks a serious understatement as that implies a subsidy burden of just R22,947 crore for the year.
Inclusive of R40,000 crore of unsettled dues to Food Corporation of India (FCI) and the R38,000 crore estimated by the fertiliser ministry as the difference between the revised outlay and subsidy requirement of fertiliser industry this fiscal, the total subsidy payment postponed would therefore be a whopping R1.18 lakh crore.
In what seemed to correspond to FE's analysis of oil subsidy budgeting, rating agency Moody's said on Wednesday that "excluding the R45,000 crore paid out to OMCs in the current fiscal for the previous fiscal's under-recoveries, the budget provision of R80,800 crore leaves only R35,800 crore for reimbursements in the current fiscal. This implies a shortfall of R42,200 crore, according to our calculations."
For the budget math to hold true, the government not only has to boldly carry out reforms of fuel and urea pricing but also has to increase the burden on upstream companies further. ONGC has long complained of the rising burden of fuel subsidy and said this has been hampering the much-needed capex plans. GAIL India's demand for exempting it from having to bear subsidies has been supported by the petroleum ministry as well.
Oil exploration companies, requiring to play a crucial role in bolstering the country's energy security by investing prudently in exploration and production, have anyway seen their share of the subsidy burden increasing from as low as 30% in 2003-04 to the current level.
Analysts say the practice of deferring subsidy payment has only become entrenched over the years. Till 2010-11, the government had settled all the pending dues to FCI under the food subsidy head.
However, due to FCI holding on to huge foodgrain stocks, on an average in the range of 55 million tonne to 60 mt, against the requirement of around 25 mt under the Targeted Public Distribution System (TPDS) and buffer stocks norms, food subsidy rose sharply in 2011-12. While the government had allocated R72,370 crore under food subsidy budget for 2011-12, FCI incurred extra expenses of R32,000 crore, which was carried forward to next fiscal (2012-13) as unsettled dues.
A food ministry official told FE that the sharp spike in expenses against allocation under food subsidy forced the FCI to take a short-term loan and the corporation had to pay more than R6,000 crore towards only interest payment on these loans in the last fiscal.
The government has revised the food subsidy estimate to R92,000 crore (RE) in the interim budget against R90,000 estimated earlier. Sources said that would still leave unsettled dues to FCI of R40,000 crore, given the jump in carrying costs. In conformity with the UPA's proclaimed commitment to the food security law, the amount earmarked for next year is R1,15,000 crore (including R88,550 crore for food security Act), up R23,000 crore from revised estimate for this year.
With a sharp rise in outstanding dues against funds allocated under the food subsidy head, the FCI will raise R15,000 crore as short-term credit for meeting expenses for carrying out its operations of procurement and distribution of foodgrain till the end of current fiscal. Besides, the FCI would raise R8,000 crore in the current fiscal through bonds.
The interim budget for 2014-15 allocates R67,970 crore as fertiliser subsidy (same as RE of this year) against a projected industry demand for R90,000 crore. As for the current fiscal, the industry demand is R74,000 crore. Of the RE of R67,970 core, around R32,000 crore would be used to clear arrears. That leaves only about R36,000 crore for this year. So R38,000 crore expenses incurred by FCI this year would be compensated only next year.
The fertiliser subsidy estimates given by Chidambaram are unrealistic. As has been the tradition with this government, there would once again be a huge rollover of unpaid subsidy. Moreover, the impact of higher gas prices would also be felt in the coming fiscal, said Satish Chander, director general, Fertiliser Association of India (FAI).
After paying last year's arrears, in the current fiscal, the finance ministry has paid only R14,500 crore towards subsidy under a special banking arrangement (SBA) to pay for the ailing fertiliser industry. Under special banking arrangements, companies are offered loans against subsidy receivables over and above their normal working capital limits, against sovereign guarantee.