The burden of subsidies

The government’s response to those who may be questioning some of the revised estimates for 2018-19 in the interim Budget presented last Friday is that the finance ministry has access to information and data that gives it the confidence to put out those numbers. That should be a reassuring message. After all, these revised estimates are crucial to the government meeting its revised fiscal deficit target of 3.4 per cent of gross domestic product (GDP) for 2018-19.

A reality check on these numbers, nevertheless, should be useful. Let us look at the expenditure on major subsidies. The revised estimates for food subsidy during 2018-19 are Rs 1.71 trillion, compared to the Budget estimates of Rs 1.69 trillion. Before the interim Budget’s presentation, monthly data for food subsidy was available till November 2018. That figure put the food subsidy bill already incurred between April and November at Rs 1.42 trillion or a monthly run rate of about Rs 17,800 crore. If one assumes the same run rate to continue in the remaining four months of the current financial year, the total food subsidy bill should increase to Rs 2.14 trillion. This will then end up being at least Rs 42,000 crore more than the revised estimates put out in the interim Budget.

Fertiliser subsidies have two major components. Under urea subsidy, the interim Budget showed that the revised estimates for 2018-19 have been reined in at Rs 44,985 crore, a little less than the Budget estimates of Rs 44,989 crore. The monthly data on urea subsidy spent during April-November 2018 puts it at Rs 33,294 crore, or a monthly run rate of Rs 4,162 crore. If the same run rate continues in the remaining four months of the current year, the total urea subsidy bill will go up to Rs 49,941 crore, about Rs 4,956 crore higher than the revised estimates figure given in the interim Budget.

Similarly, the subsidy bill for nutrient-based fertilisers, as shown in the revised estimates for 2018-19, is Rs 25,090 crore, exactly the same figure that was given in the Budget estimates a year ago. But the expenditure already incurred under this head in the April-November 2018 period is Rs 20,152 crore, or a monthly run rate of Rs 2,519 crore. And if the expenditure continues to take place at the same rate in the remaining four months of the year, the total annual bill for nutrient-based fertilisers subsidies would go up to Rs 30,228 crore, which will be Rs 5,138 crore higher than the revised estimates put out in the interim Budget.

That leaves the petroleum subsidy bill, which the revised estimates in the interim Budget had put at Rs 24,833 crore, which was actually lower than the Budget estimates of Rs 24,933 crore for the same year. Crude oil prices had gone up steeply during the year and the subsidy bills for cooking gas and kerosene should have gone up. Indeed, the subsidy bill on petroleum incurred in the first eight months of the year was estimated at Rs 23,142 crore, indicating a monthly run rate of Rs 2,893 crore. If this run rate continues for the remaining four months, the total annual subsidy bill on petroleum would go up to Rs 34,713 crore, which would be Rs 9,880 crore more than the revised estimates put out by the interim Budget.

The total expenditure incurred on these major subsidies during 2018-19, as per the revised estimates, is Rs 2.66 trillion, which is marginally higher than the Budget estimates of Rs 2.64 trillion. But if you extrapolate the data from expenditure already incurred on these subsidies in the April-November 2018 period to the full year, the slippage could be as high as Rs 0.62 trillion and the actual major subsidies bill could go up to Rs 3.28 trillion, compared to Rs 2.64 trillion given in the revised estimates.

Remember that the monthly figures on the subsidies expenditure already incurred are compiled and released by the Controller General of Accounts (CGA) every month. Of course, the CGA’s numbers are unaudited and provisional. Also, the trend rates logic may not apply in each and every case. The Budget makers have more access to information and data, which may have given them the confidence to put out the revised numbers. It is also possible that its impact on the final fiscal deficit figure could be neutralised by under-spending, compared to the revised estimates, under some other heads. Or has a part of this expenditure been deferred to the next year? But a deviation from the trend rate by as much as Rs 0.62 trillion on major subsidies alone could have serious implications for the quality of the government’s overall fiscal consolidation programme.



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