Rollover blues

The interim Budget's problematic subsidy mathematics

Under-provisioning for subsidy payments in the interim Budget for 2014-15 is likely to pose some insurmountable problems for the fertiliser and food ministries. Though next financial year expenditure on these subsidies will only increase, the finance ministry has chosen to carry forward a sizable part of even this year's subsidy burden. The allocation of just Rs 35,000 crore in the 2014-15 interim Budget for rolled-over subsidies on petroleum products may meet the oil sector's demand. But there is no provision next year for the rolled-over subsidies on food and fertilisers, for which there was an additional demand of about Rs 75,000 crore. If the new government that assumes power after the forthcoming general elections sticks to these provisions, these ministries would be in a real dilemma, especially because the alternative options to raise resources are inadvisable. The two most obvious solutions - issuing long-term bonds and making special banking arrangements - have been tried out in the past without much success. The bonds issued to the fertiliser industry in lieu of cash subsidy in the past were traded at heavy discounts. Special banking arrangements, too, have proved ineffective to adequately compensate for the entire unpaid dues of fertiliser units as well as of the Food Corporation of India. These are not real escape routes in any case, given that the interests payable on such loans ultimately add up to the payable subsidy load of the government.

Since the new government would have to somehow manage the food subsidy to implement the new food security law, the real victim of under-budgeting will be the fertiliser sector. This industry is already facing a formidable liquidity crunch owing to unpaid subsidy bills of around Rs 32,000 crore. Going by the industry's reckoning, the backlog may cross Rs 39,000 crore by the end of the current fiscal year. The subsidy on indigenously manufactured urea may, in fact, surge by Rs 10,000 crore in the next fiscal year if the government goes ahead with the proposed doubling of the price of domestically produced natural gas. Thus, more than half of the total outlay of around Rs 68,000 crore for the fertiliser sector for 2014-15 would be consumed for clearing the carried-forward subsidy arrears. Nearly 50 per cent of the operational urea units are already incurring losses and many others may also turn sick if they are continued to be starved of even their working capital. Any shortage of this vital farm input will adversely affect agricultural production and food security, given that rice and wheat account for a sizable part of the total nutrient consumption. In fact, Agriculture Minister Sharad Pawar had already cautioned both the prime minister and the finance minister about such an eventuality in a letter last December.

The most advisable long-term solution for the subsidy muddle, thus, lies in carrying out well-judged policy reforms in both the fertiliser and food sectors. The food subsidy bill can be slashed by cutting down food procurement and grain inventories to the level needed for food security. The fertiliser subsidy, on the other hand, can be tamed by decontrolling urea prices and bringing this most-consumed fertiliser under the nutrient-based subsidy scheme. Politically, this would be a difficult decision to take for a new government soon after assuming charge, but it seems the best way out.