Hamstrung by its inability to achieve target for divestment proceeds from public sector undertakings [PSUs] and lower than expected collection from direct tax revenue, government has resorted to hard posturing in regard to release of subsidy payments under major heads viz., fertilizers and food.
In regard to fertilizers, against budget allocation of Rs 73,000 crores for current year, requirement is expected to be around Rs 80,000 crores. Even as ministry of finance [MOF] is likely to provide for additional Rs 7000 crores, it is in no mood to release arrears of about Rs 30,000 crores from previous year.
MOF has also rejected a request from department of fertilizers [DOF] for a special banking arrangement [SBA] for short-term loan of Rs 25,000 crores to enable payments to industry. Its logic is that then, government will be forced to release the amount next year and that will squeeze available fiscal space.
Likewise, in regard to food, MOF is unwilling to release arrears of about Rs 60,000 crores to Food Corporation of India [FCI]. It has also rejected FCI’s request for letting it issue bonds to Life Insurance Corporation of India [LIC] saying it won’t act as guarantor to bonds.
One gets a sense that arrears will continue to be rolled over perpetually. A bigger worry is that government does not have a road-map to bring down these subsidies except to say that ‘it intends to launch direct benefit transfer [DBT] for food next year’. For fertilizers, it does not even talk of DBT.
A steep fall in international price of crude and corresponding decline in price of imported LNG had offered government a golden opportunity to streamline fertilizer subsidy regime. This could have been leveraged to not only garner substantial saving [for clearing a sizeable portion of arrears, if not all] but also, implement major reforms. Unfortunately, government has attempted none.
About 40% requirement of gas-based urea production or 7.2 million tons is met from LNG. A price reduction of about US$ 7 per million mBtu over last year, should have yielded saving of around US$ 1200 million or Rs 7800 crores. Plus, there would be saving of over Rs 1500 crores due to cut in price of domestic gas [US$ 0.43 per mBtu from April 1 and further US$ 0.94 from October 1]. This adds up to Rs 9300 crores against budget provision of Rs 38,200 crores for subsidy on indigenous urea. But, this is not seen.
This is because urea manufacturers continue to pay a high price of over US$ 13 per mBtu to GAIL which picks up gas from Petronet LNG [a consortium of 4 PSUs] under take-or-pay agreement at this price. Petronet LNG is locked in long-term contract for purchase from RasGas [Qatar] under which it is bound by a ‘flawed’ formula [ linked to average price of crude in immediately preceding 5 years without any floor or cap] leading to high price.
Even as cheaper domestic gas remains in short supply [courtesy, dithering interest among exploration and production companies due to unattractive price under extant guidelines notified in October, 2014], manufacturers will continue to depend on imported LNG and per force source supplies from GAIL/Petronet. They will have no escape from having to pay high price [to be reimbursed as subsidy] for another 3-4 years unless government re-works the agreement.
The government has made no credible efforts to streamline extant pricing regime for urea either. Thus, by freezing its MRP at existing level for 4 years, it has foreclosed option of garnering saving [10% hike can yield Rs 1600 crores annually]. In May, it had brought out a “comprehensive new urea policy” seeking to reduce subsidy burden on budget. This would lead to a meagre Rs 1000 crores annual saving in budget of Rs 73,000 crores! For details, pl read:-
http://www.financialexpress.com/article/fe-columnist/go-for-course-correction-in-urea-pricing/84006/
As regards DBT, after initial exhortations, government has now gone in to silence mode. That there will be no DBT of fertilizer subsidy to farmers is a fait accomplice after cabinet decided to continue with extant unit-wise new pricing scheme [NPS] under which payments are made to manufacturers.
In regard to food, galloping subsidy is due to ‘un-limited’ procurement from farmers at ever increasing prices, carrying stocks much in excess of requirements, giving heavily subsidized food to millions of non-poor households too, large-scale pilferage/leakages, high local taxes and reimbursement of expenses to state agencies towards handling and storage on ‘actual’ basis devoid of any norms in regard to cost and efficiency.
In January, Shanta Kumar committee had recommended reduction in coverage under Food Security Act [FSA] from extant 67% to 40%, making non-poor households pay 50% of MSP [minimum support price], restricting procurement to the extent of PDS [public distribution system] needs, permitting private sector in handling & storage and implementation of DBT in phases [to cover cities with population of 1 million to begin with, food surplus states in next phase and food deficit states in third phase].
Reduction in coverage alone would have yielded around Rs 50,000 crores annual saving in food subsidy. Additional savings would accrue due to elimination of leakages and efficiency improvements all through in supply chain. Yet, the committee’s recommendations have been put in cold storage. Even in regard to DBT, the government has merely announced its intent to run a pilot scheme in Puducherry!
With reforms in fertilizers and food stuck in grooves, it is but natural that government is shirking from paying subsidy arrears. But, what it forgets is that current dues almost touching Rs 100,000 crores will only swell and continue to haunt the budget if Modi decides not to take the road to reform highway.