Business Standard

Subsidy payouts might offset crude oil cushion

Fiscal deficit to face pressure from higher demand for food and fertiliser subsidies

Subsidy payouts might offset crude oil cushion

Arup RoychoudhurySanjeeb Mukherjee New Delhi
Higher-than-anticipated demand for food and fertiliser subsidies could result in the 2015-16 combined revised estimates for major subsidies exceeding the Budget estimates (BE) of Rs 2.27 lakh crore by a substantial margin.

This could also come in the way of meeting the fiscal deficit target of 3.9 per cent of gross domestic product (GDP) unless the government decides to defer the additional demand to 2016-17.

It is a usual practice by governments to defer the additional subsidy burden to the subsequent year to meet fiscal deficit target. In 2015-16 as well, the government's BE for subsidies had to bear the burden of expenditure backlog of around Rs 69,000 crore.

The additional demand this year is likely to be due to a larger-than-expected subsidy incurred by the Food Corporation of India (FCI) and a substantial amount of still-unpaid arrears from the previous years for fertiliser subsidies, only some of which may be paid this year, Business Standard has learnt.

While preparing the 2015-16 Budget, policymakers had based their calculations on crude oil prices averaging $70 a barrel for the financial year. It has been much lower than that for most of that period, reaching their lowest price in 12 years. On Friday, crude oil closed at $29 a barrel in New York and $33 a barrel in London.

Senior policymakers including Finance Minister Arun Jaitley have repeatedly spoken of the expected dividend for India since it is a net importer of commodities. Out of the Rs 2.27 lakh crore, Rs 1.24 lakh crore was allocated for food subsidies, Rs 72,968 crore for fertiliser subsidies.

Out of the budgeted food subsidy bill, Rs 64,919 crore was allocated exclusively for the Food Security Act. There was Rs 10,000 crore in the form of ways and means advance plus the FCI's share of Rs 87,000 crore.

Subsidy payouts might offset crude oil cushion
 
Of this last amount, the carry forward from 2014-15 was around Rs 20,663 crore, which means the total available funds for FCI were Rs 66,337 crore.

The total subsidy incurred by FCI till December 2015 was around Rs 1,18,734 crore. This means that by the end of the third quarter, the difference between total subsidy available and total subsidy incurred by FCI was around Rs 52,368 crore, the FCI website showed.

The Centre claims that in January, it released some amount which took the total amount allocated till January 12 to Rs 1,07,000 crore. That shows that unless a significant amount of funds is released in the fourth and last quarter, the total revised estimate of food subsidy should exceed the BE by Rs 11,000-15,000 crore.

The food ministry hopes most state governments would start implementing the National Food Security Act by April 2016, which means in the next financial year, the burden on subsidies would be more.

But, there is a silver lining. States that have modernised their public distribution scheme operations and taken steps to check pilferage, and digitised their ration cards would only be eligible to become part of the Act as a result of an amendment introduced after the Narendra Modi government came to power.

In fertilisers, too, the situation does not look promising. According to industry sources, the current financial year began with a backlog of Rs 40,000 crore. The Budget allocated Rs 72,968.6 crore, of which Rs 7,000 crore was used for repaying the bank loan for the previous year.

Thus, the amount left for 2015-16 was only Rs 65,969 crore. The amount allocated for urea was exhausted by August 2015 and for potassium and phosphorus fertilisers by September-October.

Apart from monthly on-account bills for the rest of the months till February 2016, there are past arrears of balance payment since November 2012, differential road freight bills pending since 2008-09, and payment of increased fixed cost under Modified New Pricing Scheme-III policy, etc.

In total, Rs 38,000 crore could remain unpaid by the end of 2015-16 as Rs 2,000 crore is expected to be provided in the last supplementary demand for grants in March 2016. With the Centre looking to cut corners, the Rs 38,000 crore could remain unpaid, which means the finance minister will have to provide for a part of this amount in the 2016-17 Budget.

Although the total subsidy allocated for fertiliser exceeds the requirement by Rs 30,000-40,000 crore almost every year, it has not helped the Indian fertiliser sector come out of the sickbed.

"With hardly any margins available under the subsidy pricing regime, most of the companies are incurring losses on account of this additional cost of borrowing," said a senior official from the Fertiliser Association of India.

As for oil, government sources say the direct savings on the budgeted subsidy of Rs 30,000 crore from low crude prices won't be more than Rs 3,000-4,000 crore. Out of the total allocated amount for fuel subsidies, some Rs 22,000 crore was for the direct benefit transfer programme for cooking gas, and the rest was for kerosene.

Officials, however, add that even some of the direct savings could be partly offset by additional cooking gas arrears from last year, which was previously unknown and which the petroleum minister accounted for pretty late in the third quarter. This could be Rs 1,000-2,000 crore. Hence, the total savings on fuel subsidies might not be more than Rs 2,000 crore.

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First Published: Feb 15 2016 | 12:40 AM IST

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