Govt asks ministries to curb cash outflow to meet deficit

Unable to check the rising subsidy bill, the government has decided to focus on curbing other fund outflows, including the expenditure by central ministries, to keep the fiscal deficit closer to the target of 4.6% of the GDP. The finance ministry has asked all ministries to identify areas where expenditure can be reduced. The ministries have also been asked to refrain from embarking on any new venture.

A large portion of the government’s planned expenditure is dedicated to meeting fund requirements for various Centre-sponsored schemes. Any savings on expenditure here would help the government reduce the widening fiscal deficit.

?These (expenditure cuts) seem shortsighted measures as the government should really

focus on controlling subsidies,? said an economist with the government wishing not to be identified. The rupee’s sharp depreciation is adding to import costs and consequently fertiliser and fuel subsidies.

On Thursday, finance minister Pranab Mukherjee accepted that the government did not pay adequate attention to address the issue of internal imbalance after the global meltdown of 2008. ?The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiment that makes it necessary to shift some of our focus back to near-term issues,? the finance minister said without giving insights into the strategy to deal with high-subsidy levels and the consequent impact on fiscal deficit.

The total subsidy burden of the government is expected to rise sharply this fiscal. Fertiliser subsidy is expected to touch all-time high level of Rs 95,000 crore, up from originally estimated figure of Rs 49,998 crore. Against the budgeted Rs 23,640 crore as fuel subsidy, the bill has already increased by Rs 30,000 crore and Mukherjee expects the total fuel subsidy for the year to surge to about Rs 88,000 crore. The food subsidy is also expected to increase to Rs Rs 95,000 if Food Security Act is passed.

The bill in high subsidies is expected to put the 4.6% fiscal deficit target way off the mark with expectations that deficit would shoot up beyond the 5% level.

Higher deficit, wavering inflation, pinching interest rates, a contracting industrial production and uncertainty over growth are all developments that indicate a slowdown.

Economists blame policy paralysis for these problems, not the crisis in the euro zone and a stagnating US economy.

?With containing subisdies being a tall order, the focus now is only on containing deficit closer to the target,? a senior official in the finance ministry said.

Despite realising as early as July that high global commodity prices will make it difficult to contain the subsidy at the budgeted levels, a fear of political backlash saw the government putting major subsidy reforms like urea decontrol, freeing up of diesel prices on the back burner.

A ministerial panel decision to hike fuel prices in June prompted three of the government’s allies to draft a strongly worded letter addressed to finance minister Pranab Mukherjee.

Regarding the proposed urea decontrol policy, it has seen opposition from the agriculture and fertiliser ministries since the start. Fertiliser ministry has opposed the policy saying that retail prices of decontrolled fertilisers, especially DAP and potash, have sharply risen by up to 100% in the last one year. The Finance Ministry which was keen to push the decontrol of urea prices has now gone back on it’s word.

In the budget, the government had earmarked Rs 1.34 lakh crore towards major subsidies like fertilizer, food and oil. But Mukherjee expects that mount to go up by a massive Rs 1 lakh crore this year.

Populist measures like the proposed food security bill will only lead to large fiscal slippage especially at the time when economic growth has taken a beating due to high interest rate regime and the overall revenue collections are also subdued. The Food Security Bill, which seeks to give legal entitlement on subsidised food grains to 64% of the country’s population will increase the food subsidy to Rs 95,000 crore from Rs 63,000 crore.

?The government needs a get hold of the total amount of subsidies it can afford to give, within which it can decide whether it wants to dole out funds for food security, bill more or fuel subsidy etc.. It needs to maintain discipline as controlling the subsidies is crucial to the fiscal health of the economy,? said C.Rangaranjan, chairman of the PM’s economic advisory council (PMEAC). Rangarajan is hopeful that the subsidy riddle would be resolved as inflation moderates, giving the government an opportunity to push measures like decontrol of fuel and fertiliser.

A task force on direct subsidy in respect of Kerosene, LPG & fertilizers has been set up under the chairmanship of Nandan Nilekani, Chairman, Unique Identification Authority of India (UIDAI) to examine and implement a solution for transfer of subsidy directly to the farmers. The task force envisages to target subsidy in stages aiming to transfer subsidy directly to the intended beneficiary once the AADHAR numbers are given. But with the whole Unique identification scheme is jeopardy due to internal conflicts and questions raised by the Standing committee of Finance, the key purpose of targeting the subsidies looks like a distant dream for now.