For a change, subsidy bill to fall

Updated: February 26, 2015 1:59 AM

The Centre’s subsidy bill will likely shrink next year for the first time in over a decade mainly due to a slump in global crude prices.

The Centre’s subsidy bill will likely shrink next year for the first time in over a decade mainly due to a slump in global crude prices and plugging of leakages in the transfer of cooking gas benefits, reports Prasanta Sahu in New Delhi. This will give it some fiscal space to spend more on infrastructure to boost economic growth. Despite an expected marginal increase in fertiliser subsidy, the total subsidy bill could be around R2.05 lakh crore in FY16, down from the budgeted R2.60 lakh crore for this fiscal. Even for FY15, the subsidy estimate could be revised to around R2.46 lakh crore when Arun Jaitley presents the Budget on Saturday.

He is likely to revise downwards the cost of three major explicit subsidies — food, fuel and fertiliser — to about Rs 2.36 lakh crore in FY15 from Budget estimate of Rs. 2.51 lakh crore due to a cut in allocations towards food subsidy, owing to the deferred roll-out of the food security Act and a marginal reduction in fertiliser subsidy, according to sources.

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The outlay for fuel subsidy for FY16 will be just R22,000 crore, down 65% from R63,400 crore for the current year, sources added. The fuel subsidy was last estimated to be lower than this in 2009-10 when it stood at R15,000 crore (but Budget did not fully reflect the subsidy burden then as government used to issue oil bonds). Besides the slump in crude oil prices, the reduction in fuel subsidy would be mainly due to the decontrol in the price of diesel and the rolling out of the direct benefit transfer system for disbursal of LPG subsidy. The government intends to contain the subsidy bill at 1.7% of GDP in FY16, down from 2.1% in FY15.

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The reduction in no way would mean that the government is out of the woods on the subsidy front. The government follows a cash-based accounting system, not accrual-based accounting, which means it continues to postpone part of subsidy payment to the subsequent years. The government had rolled over R1.19 lakh crore subsidies to this year from the previous year due to a lack of resources. It is likely again roll over about R1 lakh crore unpaid subsidies for food and fertiliser to next year.

The Fourteenth Finance Commission has recommended that government move towards accrual-based accounting from cash accounting. “While an immediate move to accrual accounting is not feasible, we think that the government could take an initial step in this direction by giving the fiscal deficit according to both the measures in the upcoming Budget,” global market research firm Nomura said in a note.

The three major subsidies account for 96% of government’s annual subsidy bill.

Prasanta Sahu

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