The union government seems to have made a good beginning in regard to achieving its fiscal consolidation goals for the current year. During the first quarter ending June 30, 2018, the fiscal deficit [excess of total receipts over total expenditure] is Rs 429,033 crore which is 68.5% of the annual target set in the budget. The corresponding figure for the first quarter of last year was 81%.
This is commendable when seen in conjunction with a substantial jump in capital expenditure to about Rs 87,000 crore during the quarter ending June 30, 2018, an increase of 27% over the corresponding quarter of last year. This is 29% of the full year target.
A key feature of the emerging trend is reduction in subsidies. During the quarter ending June 30, 2018, the payments on urea subsidy at about Rs 8600 crore was half of the payments during the corresponding quarter of last year. The subsidy payments on phosphate and potash fertilizers during April-June, 2018 was Rs 3000 crore less than payments during first quarter of last year.
The reduction in total fertilizer subsidy was Rs 11,600 crore. Together with reduction in subsidy on petroleum products Rs 4325 crore and food Rs 2800 crore, the cut in three major subsidies during the first quarter of current year was a good Rs 18,700 crore.
However, it would be erroneous to read too much into this initial trend. Indeed, extrapolating on this basis to make an assessment of the likely subsidy payments during the whole year would be fatal. The reasons are primarily two fold.
First, subsidy on fertilizers, petroleum products [POL] and food being routed through fertilizer manufacturers/importers, oil marketing public sector undertakings [PSUs] and Food Corporation of India [FCI] [besides other state agencies] respectively, payments need not necessarily correspond to the actual expenses on the ground for the relevant period.
Going by the past experience, within any given year, the government enjoys enough leeway to adjust payments from month-to-month and even quarter-to-quarter. Therefore, subsidy outgo during the first quarter gives no cue whatsoever, about the total payments made for the whole year which may turn out to be the same or even higher than in the previous year.
Furthermore, the payments made during an year need not show the correct picture of the liabilities which are much higher. In fertilizers, the carry forward of subsidy dues to manufacturers is decades old phenomenon with the only change that whereas during the 90s, the amounts used to be in hundreds crore, now in 2000s, these are in thousands crore. For instance, in 2017-18, dues worth Rs 30,000 crore remained unpaid during that year.
Under the extant accounting methodology, the government recognizes expenditure on actual payments basis instead of ‘accrual’ method of accounting. This gives it enough room for maneuver and maintain subsidy outgo at a level of its choice [an amount that would help in conforming to fiscal deficit target]. In this regard, a recommendation of the Expenditure Management Commission [EMC] under Dr Bimal Jalan – set up by Modi – government in 2014 – to switch over to accrual basis of accounting has not been acted upon.
Second, there is hardly any credible action to deal with the generic factors which contribute to increasing fertilizer subsidy. First, control on the maximum retail price [MRP] of urea at an artificially low level is an albatross around the neck of successive political dispensations and has not spared even a hard core reformist Modi. In 2015, he too took a decision to freeze urea MRP at existing level for 4 years.
The MRP being a fraction of the cost of production and distribution, this inevitably results in high subsidy on every ton of urea produced/imported and sold. So, even when production increases [Modi often talks of increase in urea output by over 2 million tons during 2015-16/2016-17 through better utilization of existing capacity], the subsidy outgo also increases.
From April 2018, the government has latched on to a system of releasing subsidy to the manufacturers only after fertilizer sale and the farmer has given Aadhaar-based authentication using e-PoS machine installed at the dealer shop. This together with neem coating of urea, it argues, will help in eliminating pilferage/misuse and resultant saving in subsidy. This sounds like day dreaming.
With control on MRP at low level unrelated to the cost based price, the incentive to pilfer will always remains. Any number of checks and balances will not be able to stop pilferage. An argument that neem coating makes urea unsuitable for use in chemical factories [hence it can only go to the field] does not hold as it is impossible to keep track and monitor a mammoth 600 million bags.
The other crucial factor contributing to high subsidy is gas price. The domestic gas which meets 2/3rd of urea industry needs costs about US$ 5 per mBtu whereas imported gas supplying 1/3rd costs much higher US$ 12 per mBtu. At these rates, the gas cost alone is Rs 11,700 per ton urea which is more than double its MRP of Rs 5360 per ton. Despite Modi – government’s efforts to bring about reduction [including renegotiation of long-term contracts for supply of imported LNG], the price remains high.
The government also continues with new pricing scheme [NPS] under which urea manufacturers get unit-specific price/subsidy. The NPS protects high cost/in-efficient units and gives no incentive to low cost/efficient units. In 2012, a group of ministers [GoM] under then, agriculture minister, Sharad Pawar had approved switch over to uniform pricing scheme – similar to nutrient based scheme [NBS] for non-urea fertilizers. But, this has not been implemented.
In food and POL also, even as little attention is paid to sustainable solutions for reining in subsidy, the observed decline is more a reflection of delaying payments within an year and carrying forward subsidy dues from year to year.
It is high time, ruling dispensation shift their focus to effectively dealing with the generic factors to reduce subsidies; instead of merely indulging in skulduggery with budget figures.