There has been much ado about fiscal consolidation ever since P. Chidambaram took over the reins of the Finance Ministry. During 2012-13, he achieved a fiscal deficit of 5.2 per cent against a target of 5.3 per cent and is aiming at 4.8 per cent during the current year.

Last year, one major factor at work was compression in investment, that was fortuitous as key ministries simply could not spend the allocated funds. Another factor was substantial under-provision for subsidies, even under revised estimates.

Against a Budget allocation of Rs 5,21,025 crore for planned expenditure (PE), the revised estimate was Rs 4,29,187 crore. The short spending was Rs 92,000 crore.

The revised estimate for fertiliser subsidy, Rs 65,974 crore, was short of requirement (Rs 102,207 crore as per the Fertiliser Minister’s statement in Parliament) by Rs 36,233 crore. For food subsidy too, there was huge under-provision of Rs 32,000 crore.

The fortuitous savings in PE and under-provision for subsidy put together add up to Rs 160,233 crore (92,000+36,233+32,000). But for these, fiscal deficit for 2012-13 would have been higher by 1.6 per cent of GDP.

The impact of subsidy

Under-recoveries on sale of petroleum products during the year were Rs 160,000 crore. Of this, upstream oil PSUs viz., ONGC/OIL were ‘directed’ to cough up Rs 60,000 crore. This too cannot be branded as saving in the true sense of the term.

For 2013-14, allocation for food subsidy is Rs 90,000 crore. This includes Rs 80,000 crore under targeted PDS and Rs 10,000 crore under Food Security Act (FSA). Post promulgation of ordinance, the Government has increased this by Rs 35,000 crore.

To bolster its credentials as provider of ‘nutritional’ security, the Government intends providing subsidy on pulses and oilseeds under FSA. That will further bloat subsidy; being a post facto decision, its impact is not captured in the Budget estimate.

The provision for fertiliser subsidy during 2013-14 is pegged at Rs 65,971 crore. On the basis that requirement would be at last year’s level (no steps hinted in Budget or outside to rein in subsidy), there would be shortfall of about Rs 35,000 crore.

The Ministry of Petroleum and Natural Gas (MPNG) is seeking to re-prioritise allocation of domestic gas from RIL’s KG-D6 fields to treat power on par with fertiliser. This will result in reduced availability for fertiliser by10 mmscmd.

Replacing this with imported LNG — to keep plants running — @ $20 per mBtu as against $4.2 per mBtu charged on domestic gas would result in an extra outgo of Rs 14,000 crore. Thus, actual subsidy outgo could exceed budget by Rs 49,000 crore (35,000+14,000).

The allocation for fuel subsidy is Rs 65,000 crore. In May, this was revised to Rs 80,000 crore.

Now, thanks to rupee depreciation and increase in crude price, this is estimated at Rs 120,000 crore or Rs 55,000 crore more than budget provision!

Thus, in respect of food, fertiliser and fuel all put together, expected requirement for subsidy during current fiscal will be Rs 139,000 crore (35000+49,000+55,000) higher than Budget provision. This translates into a slippage of 1.2 per cent GDP.

Going forward, the Finance Minister has drawn a roadmap for reducing fiscal deficit by 0.6 per cent per annum to reach 3.0 per cent for 2016-17. That gives target of 4.2 per cent for 2014-15 and 3.6 per cent for 2015-16. Alas, the situation on ground zero would be much worse!

In 2014-15, the full impact of the Food Security Act will come into play. According to the Chairman, CACP, food subsidy requirement of implementing it would be Rs 6,80,000 crore over a three-year period or Rs 2,25,000 crore per annum. This is a big jump of Rs 1,00,000 crore over likely outgo for current year.

As regards fertiliser, doubling of domestic gas price from $4.2 per mBtu to $8.4 per mBtu from April 2014 (applicable to supplies from all sources) — based on the Rangarajan Committee recommendations — will increase subsidy on urea by Rs 14,500 crore.

On the fuel front too, with continuing rupee depreciation (underlying precarious fundamentals in regard to trade deficit, inflation, interest rate et al do not bode well for abatement of its slide) and crude price beginning to move north, subsidy scenario will only worsen.

DBT, a game changer

Clearly, viewed over a five-year time horizon viz., 2012-13 to 2016-17, far from much trumpeted fiscal consolidation, we only see progressive fiscal de-stabilisation. And, the overriding reason for this is lack of will to actually bring about reforms.

Implementation of direct benefit transfer (DBT) can be a game changer. Imagine, if Government gives food subsidy only to 25 per cent (persons below poverty line as per Planning Commission) through DBT.

By excluding 42 per cent (FSA seeks to cover 67 per cent) alone, there could be saving of Rs 94,500 crore (225000x0.42).

Additionally, the Government will not have to spend on storage.

Likewise, in fertilisers, giving direct subsidy to poor/small and marginal farmers can generate substantial saving by eliminating the better-off from the ambit.

At present, MRP of urea is Rs 5,360 per tonne, which is less than half of cost from a most efficient gas-based plant and one-fifth the cost of imported urea. This is atrocious!

Urea price can be raised by 50 per cent without any adverse impact on consumption. This will generate over Rs 8,000 crore per annum saving in subsidy.

Once controls are removed, competition will drive down prices, thereby necessitating less subsidy to poor farmers.

In fuel, the steps taken so far — cap on subsidised LPG cylinder, small lots increase in diesel price — are merely cosmetic changes.

These won’t make any dent (look at diesel under-recovery, it is already back to where it was in January 2013).

Here again, DBT covering all products viz., LPG, diesel, kerosene is the way forward.

To realise the full potential of DBT in unleashing desired saving in subsidy, Government must not give any money to its agencies (all suppliers including state-owned should recover cost from market prices). Its obligation is only to poor which is met on crediting subsidy to his account.

The day Government implements DBT in letter and spirit, there will be drastic and sustained cut in subsidies. And fiscal consolidation will happen.

(The author is a policy analyst)

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