The subsidy pipe dream

Written by Santosh Tiwari | Updated: Mar 4 2014, 10:54am hrs
When the next government at the Centre presents its first full budget, it will certainly look at the numbers given in the interim budget in the backdrop of the findings like that of the independent evaluation office (IEO) which has detected the government spends R3.56 for delivering food worth R1, and the leakages in the public distribution system (PDS) is still as high as 40%. Clearly, in the absence of a workable roadmap, medium-term subsidy control projectionsand in turn, reining in fiscal deficitare just a pipe dream.

Even though the expenditure on almost everything has been cut in FY14 to keep the fiscal deficit at 4.6% of GDP in the interim budget, the subsidy bill for the year has been revised upwards to R2,45,452 crore from the budget estimate of R2,20,972 crore.

The revenue projections for FY15 look as unrealistic as they were in FY14, evident from the huge R76,965 crore shortfall. So, finance minister P Chidambaram has done the right thing by outlining the task for curtailing subsidies in the medium-term fiscal policy statement. For FY15, the major subsidies burden has been kept almost same as that of FY14, at R2,46,397 crore. This means, it will decrease from 2.2% of GDP to 1.9%. And from there, policy reforms and better targetting are supposed to bring it down to 1.8% in FY16 and 1.6% in FY17. How will this happen The two main tools targeted are price increase, already being done in case of diesel, and Aadhaar-based direct benefit transfers (DBT). The DBT scheme in LPG subsidy disbursal, currently on hold, has shown that it is possible to curb leakages through Aadhaar identification. More than R2,500 crore were transferred to the LPG consumers' bank accounts before it was stopped on January 30. Considering the leakages even on conservative estimates have been projected at 40%, there is no doubt that Aadhaar-based transfers can play a major role in bringing down the subsidy burden going ahead. This seems increasingly possible given that Aadhaar enrolment stands at nearly 59 crore at the last count and is moving ahead at a rapid paceover 30 million added every month.

On the price increase side, major work has to be done in oil and fertiliser subsidies. And in petroleum, the major part of the subsidy increase in FY14 is on this count from R65,000 crore in the budget estimate to R85,480 crore in the RE, diesel price hike will play the critical part. Though most of the impact of the diesel price hike of R5 per litre first and then 50 paise monthly, has been subsumed by the rupee's depreciation in FY14, the plan to continue the exercise till diesel is completely decontrolled is the right way to go. And according to the medium-term strategy, if there are no international shocks, this will be achieved within a year or twoof the total expected under-recoveries of R1,44,800 crore in FY14, diesel is slated to account for R68,700 crore. Then, in fertiliser, the plan is to go for immediate price correction in urea; total fertiliser subsidy has been kept at the same level as that of REFY14R67,970 crore. And the long-term plan here is to increase domestic production to reduce dependence on exports and stabilise pricessubsidy allocation for imported urea has already been reduced from R15,544 crore budgeted for FY14 to R12,044 crore in RE and has been kept at the same level in FY15. But the biggest challenge, obviously, would be to handle food subsidy efficientlyit has been raised from R90,000 crore budgeted for FY14 to R92,000 crore in RE and for FY15, it has been hiked to R1,15,000 crore, catering to the Food Security Act expenditure. The urgent need here is to strengthen PDS, better tracking of delivery chain and reduction in the food procurement and storage costs of FCI. So, the plan is in place but its efficacy will depend greatly on bold decisions on price corrections and utilisation of Aadhaar by the next government. Both appear to be standing on as weak a footing as the plan itself.