It has now been more than two weeks since the Railway Budget was presented. There has been plenty of action since then, with the new railway minister making a partial rollback of passenger fares. There has also been action on the proposed oil sector deregulation, with the oil minister indicating a possible increase in oil prices. In this piece, we look at the impact of the railways fare rollback, the feasibility of fiscal consolidation through the oil sector deregulation and some of the unexplained numbers in the Budget.

First, some of the numbers in the Budget that may give some comfort to the Government. As per the revised estimates for 2011-12, the drawdown of cash balances by the Government (to finance fiscal deficit) budgeted earlier at R200 billion, has been revised downwards to a negative R246 billion, and in 2012-13, it is projected at nil. Alternatively, this implies that the contribution of cash balances to the financing of the fiscal deficit was negative in 2011-12 and by simple arithmetic, the Government may actually carry forward a sizable cash balances (for example, this could be as much as R446 billion) into the next fiscal, a part of which may be used to enable the huge redemption of government papers in the beginning of the next fiscal (R590 billion during April-May 2012) and the rest for meeting any unforeseen slippages in the fiscal deficit for 2012-13 (independent estimates put this number at a roughly R200 billion/0.2% favourable hit on the budgeted fiscal deficit at 5.1%), without taking a recourse of increased borrowings. Interestingly, the Government is projecting (as noted earlier) a zero drawdown of cash balances in 2012-13, partly because of this carry-over and partly because of the fact that in 2013-14, the redemption pressures in the beginning of the year will be manageable, with R127 billion due in May 2013, giving the Government enough leeway.

Next, we did some back-of-the-envelope estimations regarding the rollback of the railway fare hike. As Table 1 shows, the estimated loss because of the rollback is R3,758 crore, which is translated into a slippage in the operating ratio from the budgeted 84.3 to 87.8. Interestingly, in the non-suburban segment, the loss post-railway fare hike is higher than the budgeted railway fare hike revenue (ideally, the loss should be the less than or equal to the projected increase in revenue from fare increase) in some of the segments (for example, First Class-Mail & Express and Ordinary, Sleeper Class-Ordinary).This particular trend may be possibly explained by the increased movement of some passengers to other classes (for example movement from sleeper class to AC 3-tier in trains like Rajdhani, even if the fare is high for more comfort and convenience). The converse is also true, with movement in passengers from the more costly First Class-M&E to less costly AC 3-Tier, but for the same reason. This shows that passengers clearly prefer comfort and convenience to fare (in both directions), thereby indicating that people are willing to pay more if comfort is forthcoming!

This apart, we also estimated the elasticity (responsiveness of the number of passengers traveling to fare increase) and found that in the non-suburban class, the AC 2-Tier and AC 1st Class had the maximum elasticity, followed by AC 3-Tier. On hindsight, this result may appear surprising, but the supposed high elasticity in AC 2-Tier and 1st class is because of the fact that a significant chunk of the people traveling in such classes have passes or are government servants and hence it may not matter to them even if there is a hike in passenger fares.

Next, the question of oil sector deregulation. The Budget 2012-13 has made a crucial assumption of cutting down oil subsidies by 36%, roughly R25,000 crore. However, for that to happen, the Government must announce a timetable of oil price increases. As Table 2 shows, currently the under recovery in diesel prices as a percentage of retail diesel price in Delhi is 30% (as on March 7, 2012). If we construct 5 scenarios that progressively assume an increase in international oil prices and rupee depreciation, the under-recovery in diesel prices may touch 50% of retail selling price in Delhi. Interestingly, the recent rupee depreciation, if prolonged (the probability of such an event is high, given that short-term debt repayments as a percentage of forex reserves is significant). With the Government rolling back railway fares, it remains to be seen how it takes forward the deregulation in oil prices.

The issue of oil sector deregulation brings into sharp focus the issue of proper targeting of subsidies. Take the example of kerosene. Currently, the under-recovery of kerosene as a percentage of selling price is more than 200%. Juxtapose this figure with the CAGR in kerosene consumption at a negative 2% for the 5-year period ended 2010-11 (diesel consumption expanded at 9% during the same period). The NSSO data also reveals that the percentage of rural consumption spent on fuels has declined in recent times. All these numbers point out that the intended subsidy for kerosene is not reaching the targeted beneficiaries. In fact, the Indian household has now become more intelligent in decision-making and find limited use in spending on expensive and unsustainable firewood or kerosene (expensive, since a large part of kerosene is diverted to the black market). Instead, thanks to the JNNURM mission, which provides solar lanterns and explicit benefits (for example, environmental), the poor are now happier to consider paying for solar power (small LPG cylinders are also being preferred to kerosene stoves for convenience).

To sum up, the first couple of months will set the course for fiscal consolidation and will provide a larger window of opportunity to the Government in the coming fiscal. As a matter of fact, as per the H1 borrowing calendar, the Government is scheduled to borrow 65% of the total gross borrowing requirement (of R5.7 trillion) in the first half of FY2013 (with borrowing projected to peak at R700?900 billion in the month of August 2012). On the positive side, as mentioned earlier, however, there is a possibility of lower government borrowings than the projected net borrowings, at R4.79 lakh crore for 2012-13, assuming all other budget targets are in course. Equally important is the revival in growth of the manufacturing sector, with the projected tax collections in 2012-13 (for example, excise) strikingly similar to the 2010-11 growth rates. Clearly, the Government is banking on a strong revival of the manufacturing sector in 2012-13, though it is not entirely clear how that may happen.

The author is director-Economics & Research, FICCI. Views are personal. The author thanks Aarjabh Das for research