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Budget 2018: India's unpaid subsidies time-bomb just keeps ticking away

The subsidies which are due should be paid off. Of course, this would mean that the fiscal deficit figure would become worse for a year or two

Vivek Kaul 

Over the last decade and a half, the importance of the annual of the government of India, for the media, has gone up manifold. The good part of this growing importance has been that large parts of the are minutely analysed. 
 
For the presented by finance minister earlier in the day today, the media is talking about its rural focus, in a year where 10 assembly elections are due. Nevertheless, sometimes, the media does tend to miss the wood for the trees. In the obsession for the minutiae, it misses the big points.
 
One such big point is the fiscal deficit of the government and how the government goes about achieving it. 
 
Fiscal deficit is the difference between what a government earns and what it spends.  It is also expressed as a proportion of the gross domestic product (GDP). 
 
For the current financial year (2017-2018), the finance minister had set a fiscal deficit target of 3.2 % of the GDP for the government, when he presented the last in February 2017. The actual fiscal deficit for the year is now expected to come in at Rs 5.95 lakh crore or 3.5 % of the GDP, the finance minister Jaitley said in his speech.  The actual fiscal deficit is expected to be 30 basis points (one basis point is one-hundredth of a percentage) higher than what was projected. It is interesting how this has been achieved. 
 
Before getting into this, it is important to understand that the government follows a cash accounting system. This basically means that unless money leaves (or comes into) the government treasury, it is not accounted for. In case of corporates, the moment a payment (inward or outward) becomes due, it is accounted for, irrespective of the fact whether money has changed hands or not. 
This is something that has gone largely unreported in the media, over the last few years, given that this has been happening since the time when the Congress-led UPA was in power. 
 
Basically, the government needs to compensate Food Corporation of India (FCI), for selling rice and wheat at low prices through the fair price ration shops, which constitute the public distribution system. The government also needs to compensate fertilizer companies, for selling fertilizer to farmers at a low price and oil marketing companies for selling domestic cooking gas and kerosene at a low price. 
 
Typically, the payment of a large amount of subsidies gets postponed to the next financial year. And given that the government follows a cash accounting system, a payment which is not made, despite the fact it is due, is not counted as expenditure. 
A December 2017 report by the Comptroller and Auditor General (CAG) of India, which audited the accounts of the union government for 2016-2017, found that total subsidies worth Rs 1,03,331.52 crore were not paid in 2016-2017. This included Rs 92,254.48 crore which was due to the Food Corporation of India. It also included Rs 7,174.26 crore due to the petroleum sector and Rs 3,902.78 crore due to the fertilizer sector. 
 
It also needs to be pointed out that these subsidies were only for the first three quarters of 2016-2017. Further, if other outstanding subsidy claims from previous years were taken into account, along with the unpaid subsidies for the fourth quarter of 2016-2017, the total outstanding subsidy amount worked out to a massive Rs 2,19,774.45 crore. Of this Rs 2,04,376.56 crore, was due to the Food Corporation of India. 
 
This unpaid subsidy amount is something that the government would have carried forward into 2017-2018. The subsidies which would become due during the course of 2017-2018, would also have to be paid. 
 
Taming fiscal deficit at 3.2% of GDP is a tall order
The total spending towards food, fertilizer and petroleum subsidies in 2017-2018 has been revised to around Rs 2,30,000 crore, as revealed by the presented by the finance minister Jaitley today. This estimate is basically for the subsidies that the government expected would arise during the course of this financial year. Of course, this is clearly not enough to take care of the unpaid past subsidies as well as subsidies that would have arisen during the course of this financial year. 
 
Hence, a large amount of unpaid subsidies will now be carried forward into 2018-2019. India’s unpaid subsidies time-bomb just keeps ticking away. 
 
Given that the Food Corporation of India does not get paid on time, it needs to borrow money to keep running its operations. It ends up taking on short-term loans from banks and has to pay interest on it. Banks give loans to the Food Corporation of India, simply because it is a government of India, entity. 
 
A CAG report released in August 2017, found that between 2011 and 2016, the Food Corporation of India, had paid interest of Rs 35,701.81 crore on money it had to borrow because the government did not release the food subsidy on time, or as the CAG report puts it “short release of subsidy”. 
 
Of course, by now, the number would be bigger than this and close to Rs 50,000 crore. Also, the interest that the Food Corporation of India pays on what it borrows due to delayed food subsidy payments by the government, keeps getting added to the food subsidy amount that the government owes to it. 
 
This is something that the government needs to clear up. Yes, it has inherited this mess, like a lot of other things, from the previous government, but the fact that it has continued doing the same thing as the previous government has only made the situation even worse.
 
The subsidies which are due should be paid off. Of course, this would mean that the fiscal deficit figure would become worse for a year or two, nevertheless, the government would be declaring the right fiscal deficit number, and not a fudged one, as it currently does. 
 
At the end of the day, the is an account of the government’s revenue and expenditure, and hence, needs to be presented correctly. 

(Vivek Kaul is the author of India’s Big Government—The Intrusive State and How It Is Hurting Us. He tweets at @kaul_vivek)

First Published: Thu, February 01 2018. 13:26 IST
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