A K Bhattacharya: Opportunity knocks

After managing to rein in non-Plan expenditure, the government now has the chance to introduce durable reforms in the subsidies regime

The latest data on the Union government's finances have raised concerns in some quarters over the feasibility of the fiscal deficit target Finance Minister Arun Jaitley had set for 2014-15. At the end of the first five months of the current financial year, the fiscal deficit has widened to almost 75 per cent of the full year's projection of Rs 5.31 lakh crore (4.1 per cent of gross domestic product or GDP). At the same time in 2013-14, the fiscal deficit was 74.6 per cent of the full year's estimate of Rs 5.24 lakh crore (4.6 per cent of GDP).

In an ideal world, fiscal deficit numbers should move in tandem with the progress of the financial year. For instance, the deficit level at the end of six months should be around 50 per cent of the annual projection. But that is not how the central finances have been managed in spite of efforts by many finance ministers to stagger the government's annual expenditure during the year in tune with the pace of revenue flows. Thus, the level of fiscal deficit last year crossed 100 per cent of the annual projection by the end of January 2014, though two months later it settled down at a level lower than even what was estimated at the start of the year.

That this imbalance between expenditure and revenue flows continues even in the current year should certainly cause some concern. And this needs to be corrected. But a closer look at the government's finances in the April-August period of 2014-15 shows a few more interesting trends that point towards a likely improvement in government finances.

Yes, the revenue flows in the first five months of the current fiscal year have been a little lower than they were last year. But the shortfall has been made good by a relative slowdown in expenditure, particularly in the non-Plan category, which accounts for over two-thirds of the total government expenditure of an estimated Rs 17.95 lakh crore. Jaitley had projected 9.4 per cent growth in non-Plan expenditure for the Union government in 2014-15. But in the first five months of the current year, non-Plan expenditure grew by a little more than four per cent over the previous year. The growth in non-Plan expenditure is much slower than that in Plan expenditure.

How has the government managed to rein in growth in non-Plan expenditure? Almost a fifth of such expenditure is accounted for by subsidies on fertilisers, food and petroleum products. In other words, subsidies for these three sectors are estimated to cost the government Rs 2.51 lakh crore (out of a total non-Plan expenditure of Rs 12.2 lakh crore).

The squeeze on the government's subsidies expenditure in the first five months is quite evident from the numbers. It spent only Rs 1.38 lakh crore in April-August 2014-15 on subsidies, a drop of 16 per cent over Rs 1.64 lakh crore spent in the same period last year. Thus, while 67 per cent of subsidies expenditure were used up in the first five months last year, only 55 per cent was spent in the same period this year.

Note that the gains here have come largely from a containment in subsidies expenditure on fertiliser and petroleum products. Food subsidies, too, have shown a deceleration in growth at Rs 62,000 crore in this period, compared to last year. And this has happened because the programme of supplying food grain at subsidised prices under the new food security law is yet to be rolled out in several states. This has been aided by the government's decision to not buy grain from states that announce special incentives over and above the procurement prices it has mandated. In spite of that, however, the squeeze on food subsidies expenditure has been far less than that on fertiliser and petroleum products.

This is because international crude oil prices have seen a steady decline since June this year. And going by the latest projections, crude oil prices should remain depressed for the next year or so. At the start of the year, the government had budgeted for the petroleum subsidies bill on the assumption that international crude oil prices would hover between $105 and $110 a barrel. Compared to that, the prices have gone down to $92 a barrel. The full year's benefit of the lower crude oil prices for the government's subsidies bill on petroleum products and fertiliser will be substantial. It is even likely that the government may show some savings on account of its subsidies bill, instead of the extra expenditure it has had to budget for in previous years.

For the newly set up expenditure management commission, this should come as an opportunity for effecting durable reforms in the government's subsidies regime. Apart from decontrolling diesel prices, the government should take the bold steps of devising new criteria, for instance, by restricting the supply of subsidised kerosene and cooking gas only to those who do not pay income tax. Remember that non-subsidised prices of cooking gas and kerosene are also declining and the time is opportune to move to a better-targeted subsidies regime.