Subsidy growth to be flat, easing way to deficit target
The Controller General of Accounts’ (CGA) provisional estimate of the Centre’s accounts for 2011-12, published at the beginning of 2012, revealed that actual payments towards the three major subsidies — oil, fertiliser and food — were a whopping 30% less than the revised estimate (RE) in the Budget presented in March. The CGA’s provisional account conventionally gives the first peek into the actual inflows and outflows in the preceding year, after the approximation done in the RE.
Although the finance ministry’s monthly economic report (MER) released in May also cited the CGA’s account, few analysts seem to have noticed the big gap between the actual spending on subsidies and the RE.
What the CGA said is only R1,46,951 crore was paid towards the three major subsidies in 2011-12, against the RE of R2,08,503 crore and R1,64,516 crore (actuals) in 2010-11. In other words, the finance ministry, then headed by Pranab Mukherjee, did not expend R61,552 crore of the amount shown in the RE on subsidies although this estimate is supposed to be arrived at with full knowledge of what has been (going to be) spent in the year concerned. A good part of this liability has been liquidated in the first half of FY13 — part reason for the annual increase of 89% in the first-half subsidy expenditure (MER October) to R1,41,903 crore.
This is good news for Chidambaram, who returned to the finance ministry in August, because it implies that contrary to popular notion, the subsidy claims haven’t ballooned this year. It has remained more or less at the same level as the corresponding period last year in the first half. It would therefore be reasonable, rather than unduly hopeful, to assume that the expenditure on the major subsidies in the second half can be restricted closer to R75,000 crore (actuals of H1 last year) than R1.4 lakh crore disbursed in the first half of this year. What buttresses this notion is that the global demand outlook remains subdued for most commodities including crude, fertiliser inputs and vegetable oil and, so, their prices are unlikely to flare up in the second half of this fiscal and push up subsidy claims.
Which means the 2012-13 budget estimate (BE) of subsidies — R1,90,000 crore including R1,79,554 crore major subsidies — is not as unrealistic as it would seem at first glance.
This is despite Parliament's approval sought last week for an additional expenditure of Rs 32,120 crore (cash outgo Rs 30,804 crore) mainly to meet the oil subsidy bill.
The three major subsidies accounted for some 11.5% of the 2011-12 budget. Since there is a big external factor about the size of subsidies (oil and key fertiliser inputs are largely imported), these constitute an expenditure head much less amenable to the finance minister's discretion than other items. And here, the minister has got a much-needed reprieve.
The practice of issuing bonds to oil and fertiliser firms was dispensed with in Budget 2010-11, and these firms are now being compensated for sale of goods at subsidised rates only in cash. However, it continues the custom of deferring roughly a quarter of the subsidy bill in a year (after making good the arrears) to the following year. Yet the revised estimate on any major expenditure/receipts item hasn't been so far removed from reality any time in recent history as in 2011-12. Many would find inexcusable a 30% difference between the RE and the actuals estimated soon after.
There is already a proposal to allow fertiliser companies to raise Rs 40,000 crore from banks, till the government can foot the pending subsidy bill. The expected flat growth in subsidy claims in H2 coupled with the oft-used option of deferring payment of a quarter of the year's subsidy bill to the next year would come handy for Chidambaram.
Of course, the fiscal deficit in the April-October period reached 71.6% of the budgeted level for the full year and 20% above the level in the same period last year at Rs 3,67,920 crore. This slippage is, however, attributable to a large extent to the fact that the bulk of the Rs 61,552 crore subsidy bill that Mukherjee avoided paying last year has been footed this year.
Gross tax revenue growth in 2012-13, to meet the Budget target of Rs. 10.78 lakh crore, should be 21%. Going by the pace of tax revenue growth, there could be a shortfall of Rs 30,000-40,000 crore on this front. Spectrum revenue too would be Rs 20,000 crore or so lower than the budgeted level. But Chidambaram can save more on the expenditure front – apart from the expected gain from the slow/flat growth in subsidies, he could achieve significant savings in the remaining part of the year in Plan capital expenditure where the growth in the first seven months has been about 34% as against the budgeted 27%.
So Chidambaram could try and restrict the fiscal deficit to around Rs 5.4 lakh crore, as against the budgeted Rs 5.14 lakh crore. That means the deficit in the final five months should be restricted to Rs 1.7 lakh crore. That is a tough task but not an impossible one. The slowdown in GDP growth will have an adverse effect on the fiscal deficit when expressed as percentage of the GDP. Yet, a figure of 5.3-5.4% doesn't seem to be beyond reach.
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