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Hiding subsidies away

Prime Minister Manmohan Singh recently spoke of a steep rise in the subsidy bill that will be going up to Rs.100,000 crore this year, twice the budget estimate. That should normally cause major concerns to a government that has declared its commitment to fiscal rectitude. However, Finance Minister P. Chidambaram has maintained that the government is on course to achieving the fiscal deficit reduction targets set out in the Fiscal Responsibility and Budget Management (FRBM) Acts. With the economy showing strong growth, tax collections are high. But that would only partially justify the Finance Minister’s optimism. An important factor is the decision to shift the subsidies to outside the current year’s budget. For instance, the government which has deferred by a month a decision on hiking retail prices of petrol and diesel, will almost certainly continue with its practice of issuing oil bonds to the petroleum marketing companies to compensate them for the losses arising out of very high global oil prices. That seems to be the only practicable way out; a steep increase would be politically unacceptable and fiscal compulsions rule out any major concession in indirect taxes. Oil bonds issued for a fixed term transfer the burden of subsidies to a future date and, for that reason, will not figure in current expenditure. During 2006-07, oil bonds aggregating Rs.19,150 crore were issued and this year’s figure will be substantially higher. This apart, securities worth Rs.16,200 core were issued to the Food Corporation of India last year.

The Prime Minister’s Economic Advisory Council has estimated that such off-budget items at the Centre add up to 1 to 1.5 per cent of the GDP. In addition to oil and food subsidies, there are substantial accumulated fertiliser subsidies that have not been paid out. Besides, the losses sustained by the State electricity boards will amount to another 1 per cent. The point is that the official estimates of revenue and fiscal deficits are grossly underestimated — another 2 per cent of the GDP should be added to the reported figures to arrive at a realistic picture. In more general terms, oil bonds add considerable opacity to government finances. Since a future government will have to redeem them, the risk of rising deficits is conveniently glossed over for now. There might be some valid reasons why these subsidies cannot be dispensed with immediately. Policy and procedural measures to minimise the burden and enhance the efficacy of subsidies will doubtless be fine-tuned and improved upon continually. For a true assessment of the state of government finances, all subsidies — in the budget and outside of it — should be taken into account.

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