How to plan for subsidy overruns

Written by Soumya Kanti Ghosh | Updated: Mar 26 2013, 06:53am hrs
The average slippage in subsidies for the five-year period ending FY13 was around 0.6% of GDP, more than counterbalanced by a squeeze in Plan expenditure by 0.9% of GDP

This column is not going to be an analysis of the Budget, but there are some remarkable similarities in expenditure cuts and slippages over the last five years. In particular, the fiscal consolidation endeavour recently put in place by the ministry of finance bears remarkable resemblance to such slippages.

Additionally, the cash balances with the government are another tool towards such consolidation.

To start with, the period of our analysis is the five-year period ended FY13. The justification of this is that there was a marked deterioration in the deficit numbers after FY08 on the back of stimulus and other measures resorted to by the government. Next, a couple of points regarding the fiscal scenario post-2008.

As expected and widely believed, the slippage in subsidies (the difference between the budgeted and actual numbers for the five-year ended FY13) was R57,000 crore, or 0.6% of GDP (FY13 estimates).

The squeeze in Plan expenditure during the same period was R86,000 crore, or 0.9% of GDP. The squeeze in Plan component was more so for the revenue part (0.8% of GDP) and minimal for the Plan capital expenditure component.

Thus, emerging trends suggest that the slippage in subsidies was counterbalanced (to whatever extent possible) by a concomitant squeeze in Plan revenue expenditure component. This negates the perception that cutting Plan revenue expenditures to rein in the burgeoning growth in non-Plan expenditures has been a recent phenomenon (more so in the context of the current year Budget where Plan revenue expenditure has been reduced by R77,140 crore to mitigate in part the subsidy slippage of R67,600 crore).

Another oft-repeated argument that Plan capital expenditure is being squeezed out is not correct, as there has been a limited reduction in such in the period under observation. Interestingly, it may be noted that the Plan expenditure as a percentage of GDP has actually increased over the years, and this in large part is corroborated by our findings that Plan capital expenditure growth has not been significantly compromised.

There is however a downside to the cut in Plan revenue expenditure. As our results suggest, the maximum squeeze in Plan component ministry-wise pertains to food & public distribution, home affairs & financial services. There has also been a squeeze in expenditure (to a limited extent) component for ministries engaged in delivery of welfare and countercyclical measures, like health, education, etc.

We are now in a position to relate the numbers from a fiscal consolidation perspective. The average slippage in subsidies for the five-year period was around 0.6% of GDP, more than counterbalanced by a squeeze in Plan expenditure to the tune of 0.9% of GDP. If we recall, the fiscal consolidation roadmap also vouches for an exact 0.6% reduction for every year. Strange coincidence.

There is also an added angle to this story. As per government estimates, the government may actually carry forward sizeable cash balances (in excess of R50,000 crore, or 0.6% of GDP) into the next fiscal, a part of which may be used to enable the huge redemption of government papers without taking a recourse to increased borrowings. This trend has been evident in 2012-13 also, when the government carried forward cash balances to the tune of 0.3% of GDP. This, in the end, did have a favourable impact on the deficit numbers.

Lastly, how credible are the fiscal deficit numbers for FY14 Despite apprehensions expressed in some circles regarding an ambitious revenue mobilisation target in FY14, the past trends indicate that the government may well be containing the deficit to 4.8% in FY14. This is for two primary reasons. First, the real possibility of a cut in Plan revenue component, and the second, the carry forward in cash balances may just be the adequate cushion to attain the target. In fact, the counterbalancing cuts in expenditure look all the more probable, with food subsidy bill already supposed to exceed the budgeted estimates by R40,000 crore. It remains to be seen whether the government may be doing budget jigsaws (non-Plan expenditure slippages balanced by Plan revenue expenditure squeezes and cash balances) just right in FY14 (as in FY13) to possibly stay on the path to fiscal consolidation!

The author is a senior fellow at ICRIER. Nibedita Saha,

an independent researcher, is the co-author of this column. Views are personal