Fudge Or Budget Magic? Chidambram Works Miracle With Subsidies

Here come the creepy crawlies of P Chidambaram’s budget, which painted a rosy picture about expenditure controls and his fiscal deficit targets for this year and the next.

One fudge brought to Firstpost’s notice by Paranjoy Guha-Thakurta, a columnist, is what looks like under-provisioning for subsidies.

According to the subsidy numbers put out in the Expenditure Budget, the three big F’s – food, fertiliser and fuel – are shown to be capped at Rs 2.2 lakh crore.

So far, so good.

But look closer, and this is what the numbers look like. The food subsidy, estimated in 2012-13 at Rs 85,000 crore, is up to just Rs 90,000 crore despite the addition of Rs 10,000 crore for the Food Security Bill.

There are two problems here. One, since there is no way minimum support prices (MSPs) are going to be less in 2013-14 than this year, overall subsidies will rise even without the Food Bill’s additional Rs 10,000 crore charge.

Two, costs of food storage and movement are rising due to the reduction of diesel subsidies and increasing transport charges. So the bill will be higher even without a MSP hike. So how did the FM arrive at the mere Rs 5,000 crore hike in food subsidies, especially when fertiliser prices may be hiked, too.

Next, fuel – diesel, LPG and kerosene. The subsidy bill in 2012-13 is taken as Rs 96,880 crore (that is, only the centre’s share, excluding the subsidy paid by ONGC, Gail and Oil India). This number is down to Rs 65,000 crore next year.

Again, there are two problems. One, since diesel prices are barely being raised this year beyond the usual 50 paise a month, it is highly unlikely that full provision has been made this year. If this is true, part of the payments will shift to 2013-14, impacting the subsidy bill for next year.

Secondly, a lot depends on the crude price assumptions made while earmarking these subsidies. Unless the finance ministry has assumed fairly high prices (say, $110-120 a barrel), the estimates could go wrong. At current crude prices, diesel subsidies of Rs 10.27 a litre will take 20 months to end at the 50 paise a month rate – which will take us well into 2014-15. At the end of March 2014, only Rs 6 of the subsidy would have been neutralised. Rs 4 would still be left, assuming crude prices stay where they are now. But will they, if the world economy recovers?

Last, we should look at fertiliser. This year’s subsidy figure is Rs 65,974 crore. Next year’s is practically the same.

This can mean one of two things: there will be either a cap on subsidies (no such decision has been taken yet), or imported fertiliser prices will fall. There is also the issue of demand: assuming we have reasonable monsoons, usage may go up. This will increase subsidies even if prices fall.

Has Mr Chidambaram got his sums right?