The wrong direction

Budget underestimates food, fertiliser subsidies

If the projections in the 2013-14 Budget are to be believed, subsidies on food and fertiliser which, along with petroleum subsidy, account for nearly 95 per cent of total subsidies are unlikely to rise much in the next financial year. This prognosis, reflected in an increase of just Rs 5,000 crore in food subsidy allocation and no change in the fertiliser subsidy, is odd; the actual spending is sure to exceed the budgeted level by a wide margin. While the food subsidy is set to inflate substantially next year owing to increased stock accumulation in the governments grain coffers and the possible enactment and implementation of the food security Bill, the fertiliser subsidy is unlikely to come down, given the lack of reforms in the urea sector. The Budget has paid lip service to the food security Bill by setting aside an additional allocation of Rs 10,000 crore for its implementation though it is far from clear where that number, which appears small for the task, came from.

That the food subsidy estimate in the Budget is clearly lower than it should be is obvious for other reasons as well. The government has already made known its intention to procure 44 million tonnes of wheat in 2013-14 thats nearly six million tonnes more than last years buyout of over 38 million tonnes, which was itself a record. This, coupled with an increase of Rs 65 in the minimum support price (MSP) of wheat, is bound to bloat the cost of wheat procurement. In the case of rice, too, the total procurement and the procurement prices will likely rise next year, further adding to the subsidy burden. Moreover, the issue prices of both these staple cereals will decline sharply, if the current draft of the food security Bill goes through and supplies of foodgrain to consumers take place at Rs 3 a kg for rice and Rs 2 a kg for wheat.

The fertiliser subsidy, too, appears to be a clear case of under-budgeting. The allocation of Rs 65,771 crore in 2013-14 is marginally lower than the current years revised estimate. This is despite the fact that fertiliser subsidies are unlikely to shrink unless either imports or the international price of urea drop significantly both are unlikely. Of course, decontrol of urea is very unlikely in an election year. This does not even take into account the fact that about Rs 14,000 crore of the governments dues to the industry in 2012-13 will likely be carried forward to 2013-14 as has been the case in recent years. Underestimation of subsidies, presumably to project a lower fiscal deficit number, serves little purpose when it is this obvious. The governments credibility on numbers is already in doubt, and this has not improved matters.