In the Union Budget for 2018-19, the finance minister had made an allocation of Rs 170,000 crore towards food subsidy – the amount needed to make subsidized food available to 2/3rd of the population @Rs 1/2/3 per kg for coarse cereals, wheat and rice respectively under the National Food Security Act [NFSA].
The amount is given by way of reimbursement to the Food Corporation of India [FCI] and other state agencies for the excess of the cost of procurement, handling and distribution over the sale price to the beneficiaries under the NFSA. Out of Rs 170,000 crore, Rs 140,000 crore was meant to be given to the FCI whereas, the balance Rs 30,000 crore allocated for other agencies.
Of the Rs 140,000 crore promised to be given to FCI, the actual disbursement was only Rs 80,000 crore leaving an uncovered gap of Rs 60,000 crore. By not paying this amount, the government has managed to reduce its expenditure by Rs 60,000 crore. There are other areas too where it has used similar tactics to bring about significant compression in its payouts.
In regard to oil subsidy – the amount given to state owned oil marketing companies [OMCs] viz. Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL] for selling liquefied petroleum gas [LPG] and kerosene at subsidized price – the government has not paid dues of over Rs 32,000 crore during 2018-19.
Likewise, in respect of fertilizer subsidy too – the amount to be reimbursed to manufacturers/importers towards the excess of the cost of production/import and distribution over the low maximum retail price [MRP] at which they sell to farmers under orders from the union government – it has rolled over dues of over Rs 45,000 crore from 2018-19 to the following year.
All put together, the government was able to lower its expenditure by Rs 137,000 crore or about 0.75% of GDP. It has thus managed to avoid slippage in fiscal deficit by that much percentage point. Sans window dressing, the actual deficit would have been 4.25% of GDP instead of 3.5% as per the revised estimate for 2018-19. But, this is not without collateral damage.
The short payment of food subsidy for several years has led to pile up of Rs 195,000 crore dues to FCI. As a result, the agency was forced to borrow heavily. Prior to 2016-17, it was availing of ad hoc cash credit limit from banks when it was stopped. So, it started looking for alternative funding on long-term basis.
Under instructions from the centre, FCI even borrowed from the National Small Savings Fund [NSSF] 2016-17: Rs 70,000 crore; 2017-18: Rs 65,000 crore; 2018-19: Rs 60,000 crore. The current debt of the former from the latter is Rs 180,000 crore.
The funds with NSSF is the hard earned savings of the common man which need to be invested only in avenues which promise assured return apart from ensuring safety. Yet, these have been deployed in a non-revenue generating area wherein forget return even the principal amount is not safe. Being borrowing on behalf of the union government, one might argue this is backed by sovereign guarantee hence the money is safe and return assured. Technically, this may sound ok, but the argument is unsustainable.
If, the centre can’t provide for subsidy – essentially revenue expenditure from the current years’ allocation, how will it come from future budget? Merely by transferring this liability to the books of FCI, this harsh reality can’t be wished away. It only increases debt to unsustainable level which will cripple tax payers in the future.
Delayed payment of subsidy dues to fertilizer manufacturers creates cash flow problems forcing them to borrow money at high interest rate to run their factories [and other operations] which is not reimbursed to them. This together with non-payment of legitimate dues such as increase in fixed cost leads to substantial erosion in their margins. As a consequence, majority of the urea producers are making loss despite operating at high level of efficiency.
This adverse policy environment has forced industrial houses such as Tata to sell their fertilizer business even as others are looking for suitable opportunity to exit. This has also discouraged fresh investment affecting growth of the industry.
Likewise, oil subsidy dues to OMCs dent profit margins of IOCL/BPCL/HPCL. This in turn, will affect their ability to generate much needed internal resources for supporting massive expansion and growth projects in sync with the requirement of an economy moving on high growth trajectory.
Apart from the spill-over effect on various industries which are deprived of their dues, the most serious damage is done due to the ‘complacency’ that the window dressing of government’s budget gives rise to. When, the fiscal deficit target is achieved without actually bringing about reduction in expenditure, why would our policy makers take credible measures in that direction?
For instance, a major reason for ballooning subsidy on urea is its ridiculously low MRP [current price is a mere 10% higher than it was in 2002]. This is despite the recommendation of Expenditure Reforms Commission [ERC] in 2000 to increase in steps to eliminate the gap between the cost and price over 5 years. No action on this front implies increasing subsidy in the face of ever increasing cost. But, by rolling over payments, the mandarins in finance ministry skirt the real issue.
Likewise, by not releasing food subsidy dues to FCI and showing less expenditure in the budget, they run away from dealing with the real factors viz. ridiculously low selling price of food grain and high inefficiency in handling operations by agencies. The same holds for oil subsidy [mainly LPG and kerosene].
Lack of credible measures to deal with subsidies and deferment of payments year-after-year will be catastrophic. The government should act before it is too late. For that, it should recognize that the problem exists and stop fudging its accounts.