Modi – government has improved substantially over previous dispensations in terms of increasing administrative efficiency, transparency, accountability, reducing bureaucratic red-tape, expediting approvals, enhanced/effective delivery of public services and reaching out subsidies to the needy and poor without leakage. It has also brought about reforms in many areas such as foreign direct investment, infrastructure, defense etc.
However, one area where even Modi has not acted differently is the unsustainable high subsidies on fertilizers, fuel and food and roll-over of a big slice of these subsidies year-after-year.
During 2019-20, the pay-out on fertilizer subsidy is estimated to be Rs 80,000 crore plus Rs 32,000 crore as roll-over from the previous year taking the total to Rs 112,000 crore. In the interim budget for 2019-20, the government had provided for Rs 75,000 crore. Considering the enhanced expenditure on welfare schemes and not so buoyant revenue, it is unlikely that this allocation will be increased in the regular budget scheduled for July 5, 2019. This will result in roll-over of Rs 37,000 crore to to 2020-21.
Similarly, the estimated pay-out on fuel subsidy during 2019-20 is about Rs 36,000 crore plus Rs 27,000 crore as carry-forward from the previous year taking the total to Rs 63,000 crore. Against this, the allocation made in interim budget was about Rs 37,500 crore. Considering the overall budget constraint, herein also it is unlikely that the amount will be raised in the regular budget. This will result in shortfall of Rs 25,500 crore to be rolled over to 2020-21.
Likewise, the requirement for food subsidy is estimated to be Rs 184,000 crore during 2019-20 plus Rs 60,000 crore un-paid dues from 2018-19 taking the total to Rs 244,000 crore. Against this, the provision made in the interim budget was Rs 184,000 crore which is unlikely to see any increase in the regular budget. This will result in shortfall of Rs 60,000 crore to be carried forward to 2020-21.
The numbers are symptomatic of a pattern seen during the last three decades. Whereas in the 90s, roll-over of subsidies used to be in hundreds crore, now these run in tens of thousands crore.
In resorting to this practice, successive governments irrespective of their nature [single party or coalition] or political color have been prompted by a common motive of keeping the fiscal deficit [excess of total expenditure over total receipts] within the set target. The postponement of payments to the succeeding year gives enough flexibility to reduce the expenditure, hence the deficit as a percentage of the GDP [gross domestic product] by up to 0.5%.
This way, the government can demonstrate that it is sticking to the fiscal consolidation road-up thereby ensuring overall macro-economic stability without actually making commensurate efforts to reduce the expenses and increase revenue collection. In turn, it succeeds in avoiding the adverse consequences viz. downgrade of sovereign rating, increase in interest rate, inflation etc.
They are enabled to do this [without being held accountable] because of an accounting methodology that allows them to book expenses on cash basis i.e. when the payment is made instead of the point of time when the liability accrues. When, to release the payment is entirely within the control of the government. This is because subsidies are given through the manufacturers and agencies such as FCI who sell the products at price lower than the cost of production/procurement and distribution and get the shortfall made up through subsidy.
Being on the receiving end, even if subsidy reimbursements are delayed, there is little that the manufacturers/agencies can do. The government also goads them to borrow money from banks and other sources [in the last 3 years, FCI was even asked to borrow from National Small Savings Fund (NSSF)] against subsidy receivables. This eases pressure on the centre and the practice merrily continues.
In 2015, the ‘expenditure management commission’ under Dr Bimal Jalan, ex-governor, RBI had recommended switch-over from cash based system to accounting of subsidies on accrual basis. But, that recommendation was quietly buried.
All political dispensations are also unified in paying scant attention to the factors which contribute to increase in subsidies. The most important of these factors is their decision to maintain the selling/issue price at artificially low level. Whereas, in case of food, the price is a tiny fraction of the cost of supply [1/12th in case of wheat], for urea [most widely used fertilizer carrying nitrogen], this is ½ to 1/3th of the cost depending on the unit that supplies the material.
The subsidy also goes up due to increase in cost of production and distribution. In this regard also, the governments have done little to rein in the cost. In fact, they have nurtured systems which encourage manufacturers/agencies to claim higher cost; for instance, New Pricing Scheme [NPS] in case of urea or reimbursement to FCI for handling and distribution expenses on ‘actual’ basis.
The payments are also influenced by sheer quantities produced/procured and handled by the agencies. Thus, the existing arrangement of ‘open-ended’ procurement of food at minimum support price [MSP] has led to agencies piling up stocks far in excess of the requirement for public distribution system [PDS] under the National Food Security Act [NFSA] plus strategic buffer. At present, they hold more than double of what is actually required.
Umpteen number of committees have recommended drastic reforms of the above systems to rein in subsidies. For instance, in 2000, the Expenditure Reforms Commission [ERC] had proposed a 5-year road map for complete elimination of fertilizer subsidy. In 2015, the Shanta Kumar committee had given proposals for drastically pruning food subsidy. But, these have all remained on paper.
If, our political class does not have the gumption to tackle the fundamental factors leading to higher subsidy and yet, if they have to keep fiscal deficit under control, they fall back on the easy option to defer payments. This is precisely what they have been doing till date and it seems unlikely that things will change.