Given that this year’s budget began with an unrealistic R 65,000 crore petroleum subsidy number despite FY13’s R97,000 crore—which included a R53,000 crore slippage—it was always obvious the fiscal numbers would go horribly wrong on this front. And this is when, in FY13, R64,000 crore of the under-recoveries were borne by various oil PSUs—this year’s total under-recoveries are expected to be in the region of R1.4 lakh crore. More alarming, as a just-concluded FE series on subsidy rollovers shows, the government deferred R60,000 crore of subsidy payments in FY12 and this rose dramatically to R98,000 crore in FY13 and is likely to be around R1.2 lakh crore this year. Since this year’s figure is more than 1% of the likely GDP, it does make a mockery of the subsidy-control the government is looking at.
In which case, when a new government comes to power, it needs to clean up the country’s subsidy structure. So, under-recoveries borne by oil PSUs need to explicitly be brought into the budget over a period of time just as, in the case of electricity subsidies to farmers, the decision taken was that over a period of a few years, they would be explicitly paid for by the state governments—when the power bailout happened some months ago, it was discovered that while the state electricity boards were booking these subsidy payments, the dues had not actually been received. The fact that oil PSUs are so strapped for cash—their collective borrowings are R1,29,000 crore—is also due to the fact that their payments are being delayed. Indeed, while the finance ministry is keen to change the way in which under-recoveries are calculated—this was rejected by the Kirit Parikh committee—oil marketing companies IOC/HPCL/BPCL have put forward a R20,000 crore extra bill of losses due to late payments and unrecovered subsidies. Nor is it just the oil companies, payments are delayed to FCI and fertiliser companies also, forcing it to borrow from the market to keep operations going.
Apart from cleaning up the subsidies regime, the larger question the next government has to examine is what subsidies it wants to keep and which it wants to junk. If the Food Security Act alone is to cost 2% of GDP as the Commission for Agricultural Costs and Prices estimates, some other subsidies simply have to go. No country with as low tax collections as India can afford to run a social security