Union budget is a holding operation

Union budget is a holding operation

New Delhi: The United Progressive Alliance government’s plan to prune the fiscal deficit next year is optimistic and based on assumptions that may not hold true, economists said.

“Both the borrowing and fiscal deficit numbers have been worked out taking into account the most optimistic macro-economic scenarios, which in all likelihood is not going to be the real situation," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Although the government has given an assurance that the National Food Security Bill to provide wheat and rice at subsidized rates to poor will be introduced in Parliament this year, there is no money allocated to implement the provisions of the Act.

The C. Rangarajan committee has estimated that implementation of such a plan, proposed by Congress chief Sonia Gandhi-headed National Advisory Council, would cost the government 92,000 crore.

Some analysts find the UPA government’s goal of over 9% growth from 8.6% expected in the year to March and paring the fiscal deficit to 4.6% of the GDP from 5.1% overly optimistic, given the high global oil prices and food inflation.

In fact, the government has cut total subsidy, which includes subsidy on food, fuel and fertilizers, for next fiscal by more than 20,500 crore.

“The decontrol of the diesel prices needs to happen rapidly," said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors. “Else, the economics of the budget carries the material risk of adverse impact by the surging oil prices. The provision of 23,000 crore in the budget is inadequate to carry through the required funding of under-recoveries as per current mechanism, prevailing prices."

The government has allocated 60,573 crore for food subsidy compared with 60,600 crore in revised estimates for budget 2010-11. While petroleum subsidy is estimated at 23,640 crore compared with 38,386 crore in the current fiscal. The fertilizer subsidy is also pegged lower at 49,998 crore against current year’s 54,976 crore.

“There is a roll over of 10,000-12,000 crore from current fiscal as far as food subsidy is concerned," said finance secretary Sushma Nath. “So it was decided to keep food subsidy allocation at this level. If the food security Bill is enacted, the allocation can be raised in supplementary budgets."

Finance minister Pranab Mukherjee also announced the first step to shift to a cash-transfer system to reach the benefits of government subsidies to the targeted beneficiaries effectively. “To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilisers, the government will move towards direct transfer of cash subsidy to people living below poverty line in phased manner," he said.

The government has set up a task force headed by Nandan Nilekani to work out modalities for transferring subsidy for kerosene, cooking gas and fertilizers. “The idea is to strengthen the delivery system so that they reach the targeted beneficiaries," said Kaushik Basu, chief economic adviser to the finance ministry. However, the cash-transfer system for these products will be in place only by March 2012 and it is not clear if the government will introduce the same for the food subsidy as demanded by states such as Bihar and Delhi.

While the Plan expenditure has been raised 18% the non-Plan expenditure has been raised by more than 10%, said Nath. She said the increased tax buoyancy will also help maintain fiscal consolidation.


Mint’s Utpal Bhaskar and Reuters contributed to this story.