Not just explicit cuts, tweaked subsidy math also to help FM

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SummaryBesides higher expenditure compression achieved since he took charge and the twin assault on fuel subsidies — price hikes and better delivery of the doles — finance minister P Chidambaram is taking several measures to slow spending growth in 2013-14 and beyond.

Besides higher expenditure compression achieved since he took charge and the twin assault on fuel subsidies — price hikes and better delivery of the doles — finance minister P Chidambaram is taking several measures to slow spending growth in 2013-14 and beyond.

Unlike the more obvious attempts at expenditure control, these steps have a bit of covertness about them for their technical nature and hence, are likely to escape public criticism. Nevertheless, these will potentially help the minister in his fiscal consolidation plan. No less so in the next fiscal, given Chidambaram’s plan to reduce fiscal deficit to 4.8% of the gross domestic product (GDP) even as most forecasts peg growth below 6%.

Most importantly, questions have been raised by the finance ministry over the manner of estimating oil and fertiliser subsidy amounts by the administrative ministries concerned and alternative models entailing considerable potential savings are being flagged. Further, capital receipts from PSU disinvestment are being proposed to be used only for productive, asset-creating spending — a move that could help reduce wasteful utilisation of these resources for revenue expenses in the guise of social-sector spending and generate some incremental growth out of these with the resultant acceleration of revenue streams. A little more flexibility in employing the usual way of deferring a chunk of the subsidy payments on fuel and fertiliser due in a given year to the subsequent one is also on cards, without fluttering the industries concerned too much.

The finance ministry, as FE has reported, is insisting on shifting to export parity pricing for calculating under-recoveries of oil marketing companies from the existing trade parity model. If this model were implemented in 2012-13, OMCs’ under-recoveries would have been R18,000 crore less (Full-year under-recoveries are now estimated at R1.67 lakh crore). Under this system, OMCs will be considered entitled to fetch refinery gate prices equal to a defined, average export (FOB) prices of their products (petrol, diesel, cooking gas and kerosene) in select markets and the difference between the price realised by them and the export price determined will be treated as under-recoveries, to be compensated through subsidies. The proposed method will allow more savings for the government on the subsidy front because the export parity price is bound to be lower than the trade parity price which is sum total of landed cost of imports and export price in the 4:1 ratio.

This is because while export and import prices don’t vary too much, landed cost of imports includes tariff, domestic taxes and transportation charges, unlike export price which doesn’t include import tariffs and transportation charges.

The plan could pinch oil companies, though. Downstream oil PSUs must find alternative ways to boost revenue (improving refinery margins, for instance).

The OMCs’ concerns have already been expressed through their apex body Petroleum Federation of India, which sought to highlight that Indian refiners, in general, incur higher energy charges and pay more freight compared with their West Asian counterparts It is not clear if the upstream companies whose share of the subsidy burden has risen from around 30% in 2009-10 to 40% and higher in the three subsequent years will be shared the benefit of the new plan.

On subsidy payments, Citi Research recently said the government might defer at least 50% of its payment share of R1 lakh crore in 2012-13 to next year. It actually did slightly better and to be precise, the oil subsidy payment by the Centre this fiscal will be R60,080 crore. This factors in the comfort letter issued by the finance ministry last week to oil companies, promising an additional cash subsidy of R25,000 crore. (Oil firms had posted profits in the second quarter after reporting heavy losses in the first quarter, thanks to release of R30,000 crore earlier this year. Of the budgeted fuel subsidy outlay of R43,580 crore, R38,500 crore was used to pay the 2011-12 dues).

Of course, the proposed monthly hikes in retail diesel prices (till the under-recoveries are nullified in some to years) and the deregulation of bulk diesel prices that accounts for a fifth of the fuel’s consumption would bring significant savings on the subsidy bill – 0.5% of GDP in 2013-14 according to Citi Research. Put differently, the gross fuel subsidy bill could be around Rs 1.1 lakh crore next fiscal as against an estimated Rs 1.6 lakh crore this fiscal. The government’s share of next year’s oil subsidy burden would be Rs 69,800 crore as against over Rs 1 lakh crore this fiscal. If export-parity pricing is adopted for subsidy estimate (this benefit might be shared with upstream firms as well), bills would be even less. If the government opts to keep all gains from the partial deregulation of diesel price with itself, the share of upstream companies in the subsidy (in the form of giving hefty discounts in crude supplies to OMCs), would rise to 54% in 2013-14 while the absolute amount would increase relatively marginally, as per Citi Research.

Chidambaram’s bid to stem subsidy bills extends to the fertiliser sector as well. While his ministry has asked a question or two about the way the fertiliser ministry estimates the subsidy amount, the deferral of payments is said to be larger this year, while pending fertiliser subsidy bill since August is over Rs 40,000 crore.

Another initiative is regarding the use of disinvestment proceeds, a major head of non-debt capital receipts, which is expected to be close to Rs 27,000 crore this fiscal. As per the recent decision of the Cabinet Committee on Economic Affairs (CCEA), the National Investment Fund (NIF) created out of disinvestment receipts would now be used to recapitalise public sector banks and state-owned insurance firms. This marks a departure from the decision taken in 2009 at the peak of the global financial meltdown that the disinvestment proceeds would be used only for social-sector spending.

Expenditure growth during April-December this fiscal has been less than the budgeted 13.1% at 10.6%, thanks to a big squeeze on capital expenditure. (During Apri-December, capital expenditure grew just 9.6% year on year as against the budgeted rate of 30.6%). With GDP growth much less than budgeted 7.6% (5% as per latest statistics ministry estimate), revenues have been hit and April-December growth has been 13.8% against the budget projection of 22.7% (this must have improved a bit after the NTPC disinvestment that fetched close to Rs 12,000 crore), with net tax revenue growth being 15.2% against 20.1% seen in Budget. While Chidambaram had to cut growth-inducing capital spending to meet his fiscal objectives this year, the series of subtle but substantive changes he is proposing to bring on the expenditure front would stand him in good stead for 2013-14.

Balancing Act

* Finmin has questioned the manner of estimating oil and fertiliser subsidy amounts

* The proposed shift to export parity pricing model to reduce under-recoveries

* Govt may also defer some of its subsidy payment obligations to next fiscal

* National Investment Fund to be used to recapitalise PSBs, state-owned insurers

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