New Delhi: The government plans to cut its subsidy bill to under 2% of the gross domestic product (GDP) in 2012-13, finance minister Pranab Mukherjee said in his budget speech on Friday.
High crude oil prices and burgeoning fertilizer subsidies, primarily on account of imported non-urea fertilizers, have meant India’s subsidy bill has zoomed to Rs2.16 trillion, or 2.5% of the GDP.
Mukherjee has set an ambitious target to reduce this to under 1.75% of the GDP by 2015-16. The government mainly spends money in subsidizing food, fertilizers and fuels.
The subsidy bill has overshot by nearly Rs73,000 crore above the Rs1.43 trillion the government had budgeted for last year. In actual terms, the figure is up by a little over Rs43,000 crore over the Rs1.73 trillion spent during 2010-11.
Subsidy on petroleum products has made the biggest dent in the government’s balance sheet from last year. While in 2010-11 the government spent Rs38,371 crore on oil subsidy, in 2011-12 the figure shot up 78% to Rs68,481 crore. For the next year, the government has substantially reduced the budgeted amount for oil subsidy to Rs43,580 crore.
The spend in the year ending 31 March was nearly three times the Rs23,640 crore budgeted for in the last budget. While the estimates in last year’s budget were pegged to the price of brent crude at $90 a barrel, its average price during the financial year stood at $115 a barrel. Crude prices in the international market are currently hovering in the $125 a barrel range.
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“The continuing uncertainty in the global environment makes it necessary for us to strike a balance between fiscal consolidation and strengthening macroeconomic fundamentals to create adequate headroom to deal with future shocks,” Mukherjee said.
Mukherjee’s calculations could go awry, according to Sunjoy Joshi, director at the New Delhi-based Observer Research Foundation. Joshi said the government is likely pegging the cost of crude oil at $100 a barrel, a figure he said seemed unlikely to hold. “If the Iran crisis continues, the price could easily touch $150 a barrel. If that happens, oil subsidy would shoot way past the amount the government has budgeted for,” he said.
Joshi said in the current political scenario, the government is unlikely to allow state-run oil marketers to set the prices of diesel, kerosene or cooking gas.
The next highest increase in subsidy outgo comes due to food subsidy, on which the government expects to spend Rs72,823 crore, an increase of 14% over Rs63,843 crore spent in 2010-11. For 2012-13, the government has budgeted for Rs75,000 crore on food subsidy.
The government also hopes to spend less on fertilizers next year by about 10% compared with the Rs67,198 crore it spent this year.
Subsidy reductions on non-urea fertilizers, including diammonium phosphate (DAP) and muriate of potash (MoP), announced in February, would ensure the total fertilizer subsidy bill is capped around the Rs60,974 crore that has been budgeted for 2012-13, a fertilizer ministry official said, requesting anonymity.
He, however, admitted that anywhere between Rs23,000-25,000 crore would be carried over to the next year. “The total fertilizer subsidy spend this year was in the range of Rs92,000-95,000 crore. The figure that appears in the revised estimates is only that amount that has actually been disbursed to companies,” he said. “It does not include the arrears.”
This official said that the proposal to provide viability gap funding to domestic fertilizer units could help existing units modernize. “These units could use such grants to improve efficiency parameters, thereby reducing energy requirement and consequently helping bring down subsidy,” he said. The government subsidizes the entire cost of gas that goes towards producing urea, the most dominant fertilizer.
India imports nearly all its requirement for non-urea fertilizers, while more than two-thirds of the country’s urea requirement is produced locally.
Although Mukherjee expects to bring the subsidy outgo down to a little more than Rs1.9 trillion in the year starting 1 April, the figure could substantially go up since the government plans to “fully provide for” subsidies related to food and for administering the proposed food security law. “All other subsidies would be funded to the extent that they can be borne by the economy without any adverse implications,” Mukherjee said.
The draft food security legislation was introduced in the last session of Parliament but is unlikely to be cleared in the current session, food minister K.V. Thomas said on Thursday.
Joshi said the food subsidy bill could cost the government an additional Rs30,000 crore a year. “Where will they get all that money from?” he asked. “Some subsidies at this juncture in our development are inevitable. But they become undesirable if they compromise the macroeconomic fundamentals of the economy, more so, when they don’t reach the intended beneficiaries,” Mukherjee said.
Yashwant Sinha, former finance minister and leader of the principal opposition Bharatiya Janata Party (BJP), said Mukherjee’s estimate of a 5.1% fiscal deficit, compared with 5.9% for 2011-12, is “monstrous”.
“Even this is based a premise that subsidies are reducing by Rs26,000 crore. This is not withstanding that the food security Act may come into force. This is not withstanding the fact that, in the budgetary estimates of 2011-12, and the revised estimates, the subsidy burden has merely increased Rs73,000 crore,” Sinha said in a statement.
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