In an exclusive interview finance secretary Sushma Nath talks to FE’s KG Narendranath and Himani Kaushik on doubts raised in certain quarters about the feasibility of Budget numbers, the subsidies reform and the proposed food security law
Oil prices have soared in the last few weeks. It is estimated that a price of $120 a barrel for the Indian basket of brent crude for the whole year (which is not much higher than what it is today) would push oil subsidy bill itself to R2 lakh crore this year. Is the expenditure control envisaged in the Budget ? which even then looked rather ambitious ? going astray?
Conventionally, we have seldom provided for the under-recoveries (of oil marketing companies) in the Budget. But this time around, we expected a certain hardening of crude oil prices, and thought that rather than wait for the supplementary, provide something for that in the Budget itself. At that time (when the Budget was made), the average crude price was $70-80 per barrel. And we provided for R20,000 crore. In the case of all other subsidies also, higher amounts were provided in the third phase so that the rollover would be less. The rollover used to be much higher in earlier years. For example, in fertiliser subsidy, there would normally be a rollover of R13,000-14,000 crore. But we provided R8,000 crore in the third supplementary last year; so the expected rollover was only R6,000 crore. During the last quarter of the year, our cash position was also much better and this helped us to provide funds early enough.
There was but a bit of scepticism over the Budget estimate that expenditure this fiscal would grow by just 3.4% over the revised estimate of 2010-11.
As the finance minister has made it clear during the Budget debate in Parliament, what needs to be seen is the BE (budget estimate) over BE (of the previous year). It is never BE on revised estimate (RE) (which needs to be reckoned). Last year, since we had a comfortable cash position thanks to the 3G spectrum auction, we released some extra funds in the third phase. As for this fiscal, we preferred to keep the BE at the same level to which the expenditure was brought in the previous year. That is why the increase (BE over RE) is only 3%. But if you take BE (this year) over BE (last year), then there is a 13% increase.
Petrol price was deregulated in July 2010, but oil companies continue to exercise restraint and don’t promptly pass crude price increases to the consumer. How and when would the pricing regime for diesel, LPG and kerosene be changed?
When the group of ministers (GoM) decided to free petrol from the administered price mechanism in July 2009, it, in fact, also took an ?in-principle? decision to deregulate diesel prices also and have schemes for better targetting of kerosene and LPG subsidies. But, diesel has since continued to be regulated because of inflationary pressures and the fact that raising its prices would put additional pressure on inflation (A lot of this fuel is meant for transportation).
Deregulation will have to be done at an appropriate time and needs to be calibrated. The government has to ensure that retail prices of the fuels are in sync with the current oil prices and guard against (freed) prices exerting too much impact on inflation. The RBI, in its recent monetary policy, has also advocated such a policy. So, a decision will be taken by the GoM concerned, bearing all this in mind and with all necessary inputs. The GoM will be meeting soon.
As we fixed the Budget figures, we had in mind the GoM’s view that rational decisions on fertiliser and petroleum subsidies would help contain the subsidies.
I cannot predict what call the GoM will take now but naturally, they will take inputs from various ministries and also an important input from the chief economic advisor who is heading a group on inflation. So, we expect rational decisions to be taken, but the GoM will have look at the issue in a holistic manner.
On fuel prices, do you have an internal figure on how much increase in the subsidy could be tolerated?
You have to look at four things ? diesel, petrol, LPG and kerosene. Petrol is deregulated; in fact, the oil companies were given the freedom to increase prices as they felt appropriate. Diesel (deregulation) was supposed to be calibrated. As far as kerosene and LPG are concerned, a very important policy change was announced by the finance minister in the Budget speech ? cash transfer for better targetting of the subsidies.
Currently, LPG moves at subsidised rates right across the supply chain ? the depot, wholesaler, retailers and the beneficiary. As for kerosene, a lot of it is siphoned off and is used for adulterating petrol and diesel. Also, quite a lot of quantities are smuggled off from border areas because our neighboring countries don’t keep the levels of subsidies as we do. (This is true not only in the case of petroleum products but fertilisers also). So, while the government spends a huge amount to provide kerosene at subsidised rate to the poor for their cooking and lighting needs, a large chunk of it doesn’t reach the intended beneficiaries. The whole idea of cash transfer is to ensure that the product moves at market prices across the supply chain and providing whatever subsidy required at each level. We have thought through this and are confident that we will actually be able to contain subsidy through (cash transfer). The Nandan Nilekani committee is working on the modalities (of cash transfer).
The smart card system has to be linked up with Unique Identification Number and the pilot projects for this are on. In case of LPG, (absence of) UID is not a constraining factor because there are identified customers and a much smaller base (than that for kerosene).
So, will LPG be the first to be brought under the cash transfer scheme?
Yes, LPG will be the first (to be shifted cash transfer scheme). In the Budget speech, the outer limit (for introduction of cash transfer scheme) was defined as April 1, 2012. in case of kerosene, pilot projects are going on and let us see the results. But LPG can be targeted straightaway. You need to contain subsidy by targetting and curbing misuse. The users (with subsidy entitlement) will be issued smart cards. Only when the cardholder lifts the kerosene/LPG, the transaction will take place. So, the subsidy will be linked to the actual use of the fuels.
Do global commodity prices pose a threat to the target to reduce the fiscal deficit to 4.6% of GDP for 2011-12?
As far as the government is concerned, what is sacrosanct is the fiscal deficit as well as the path of fiscal consolidation. We will not breach the fiscal deficit number given in the Budget. As far as the expenditure budget is concerned, we have kept enough room for adjustments. The budget has grown to R12 lakh crore-plus over the years and so, we will have to gauge the absorption capacity more seriously. Money is not the constraint but the (limited) absorption capacity and the human expertise available in the field to make optimum use of the funds. If the states fail to spend the money allocated, further release of funds could be withheld.
In case of food subsidy, the budget estimate for this fiscal is the same as last year, although the food security scheme needs to be rolled out this year.
The food subsidy is economic cost minus what you are getting from the BPL, APL consumers or open market sales. The economic cost comprises the procurement cost, interest payment, carrying and storage costs etc. The government needs to lock up its money (pay upfront) for ensuring grain availability. Once the stocks are there, the legal entitlement is a concomitant; and so, whether you have the food security bill or not, there won’t be a much of a difference (as far as expenditure management goes).
Food security Bill could require a stepping up of grain procurement (other than MSP operations) by the government. But since there are enough stocks, there might not actually be a need to buy more from the open market and disburse. So, there is a cushion available for us on this front. What might be needed is a lowering of the Central Issue Prices and this could inflate the subsidy a bit.
The Rangarajan Committee and National Advisory Committee differ on the extent and modalities of the food security scheme. What would be the model that you adopt ultimately?
The Rangarajan committee has approached the issue from the point of view of the availability of food grains for the scheme that entails legal entitlements. The committee argued that legal entitlement based on imports might not be sustainable. If you are dependent on imports to meet the legal requirement, then your demand alone can push up global prices and the country could then be at the mercy of the foreign cartels. We have the example of 2008-09 when global urea prices skyrocketed and pushed the fertiliser subsidy bill to the unprecedented level of about R1,00,000 crore.
So, as you plan the whole thing, you have to look at (domestic) production and the likely procurement which has traditionally been 30% (of production) on an average. So, taking that into account, the panel put the availability at 57 million tonne (mt). Minus the buffer stock, the running average of which would be around 2 mt, and another 8 mt needed for the social security schemes like mid-day meal, ICDS etc, one is left with some 47 mt.
There isn’t much of a difference between the NAC and the Rangarajan panel on the size of the priority sector. What is being proposed by the panel is that 35 kg of grain per household could be the legal entitlement. This needs to be restricted to the priority households, in view of the grain availability.
The NAC proposes that legal entitlement be made universal ? that is, extend it to above poverty line (APL) households also. For APL, even today we are giving 10 kg per unit but this is not a legal entitlement but provided though an executive order. Rangarajan panel did not recommend that APL families be kept out of the food security scheme, but argued against giving them legal entitlement, which practically would be reliant on imports. Giving 35 kg of rice/wheat ? at R3 and R2 kg respectively ? to priority households would not create an issue of availability.
The NAC is saying that the estimate of the BPL category by the Rangarajan panel is flawed and would leave some sections out. So, the essential difference between the two is that while the Rangarajan panel wants legal entitlement to be restricted to priority sector, the NAC says APL households should also be given legal entitlement for universal coverage, even though the quantity of grain could be less in their case. It is for the group of ministers on food security to take a final call on this.
The finance ministry is of the view that it legal entitlement ought not to rely on the externality of imports.
The GoM would, however, take inputs from food, consumer affairs and agriculture ministries also.
When will the food security Bill be tabled?
It is the stated aim of the government to bring the bill this year. It was stated in the FM?s Budget speech that during the course of the year, the bill would be brought in.
Tell us about the reformulation of capital and revenue expenditure heads and the coinage of the term effective revenue deficit in the Budget.
By definition, capital expenditure should create assets and these should be owned by the entities which are taking the money. However, what is happening with all the flagship schemes of the central government is that a lot of funds are given as grants to state governments, which use these funds for creating capital assets. Now, once you see it as a grant, it becomes a revenue expenditure for the Centre, even though the assets are created and owned by the states.
The matter was discussed by the Standing committee of Parliament last year in the context of the concerns over the decline in capital expenditure as a percentage of GDP over the years while revenue expenditure has gone up.
In classical theory, this is a wrong trend. But it was pointed out that the spending on capital assets was not actually going down. Partly, it was an issue of definition. That?s why we have introduced a new category in the Budget which is ?grants for capital asset creation? under the revenue head.
So, at least it is known that how much of expenditure is going for capital creation.
We have asked all departments to report how much of their spending is going for creation of capital assets, under schemes like Sarva Siksha Abhiyan. That is now reflected in demands for grants. We have got a new Annexure 6 in the expenditure budget documents which shows how much has gone for capital asset formation from the revenue expenditure.
Consequently, we have come out with the term called ?effective revenue deficit?. We are trying to be as transparent as possible. There is a committee headed by C Rangarajan which is looking into what should come under capital and revenue heads.
Is there a need to continue to classify expenditure as Plan and non-Plan as well?
The Rangarajan committee is looking into whether you need that division or just assess the outcomes. The Constitution doesn’t mention Plan and non-Plan heads of expenditure. So, the report is expected to come out quickly and before the formulation of the 12th Plan, all things would be clearer on this front.
The RBI has raised doubts that whether revenue deficit could be brought down to zero by 2013-14 as stated by 13th finance commission.
If you take the effective revenue deficit, then that target can be met. If you take revenue deficit per se in the classical sense, then meeting the finance commission target would not be that easy.