Budget 2023: Fertiliser, food subsidies can upset fiscal math

Political Compulsions

The subsidy could be reduced either by increasing the MRP or decreasing the cost of supply or a combination of both. Given the political sensitivities, an increase in MRP is completely ruled out. If, at all, the government had felt the need, this would have been announced in the budget speech – as per past practice. But this is not done.

As for the cost of supply, given India’s overwhelming dependence on imports of fertilisers (as well as raw materials used in their production), the most crucial determinant is their international price. These prices have been on the boil for the last two years. During 2021-22, the prices soared due to a surge in global demand and restrictions on export put by China – a major supplier – to boost availability for its domestic needs.

During 2022-23, the Ukraine war played a spoilsport. India sources a good chunk of fertiliser imports from that region. Given the unfolding geo-political situation, there seems to be no end to the war till the end of 2023-24. Therefore, any relief from the current tight global supply and elevated fertiliser prices is highly unlikely.

There has been a softening of prices in recent months.  For instance, the price of LNG declined to $25 per million British thermal unit or mmBtu from a high of $50 per mmBtu. But this is a temporary blip caused by fears of an upcoming global recession and some luck with the weather in Europe. But things will change soon as Europe will need more LNG this year after Russian supplies cease and China’s need for gas will increase after lifting Covid19 restrictions.

Carry Forward Of Subsidy

The underlying fundamentals clearly point towards fertilisers and raw materials prices remaining at an elevated level. This would mean subsidy payments rising well above Rs 2 lakh crore during 2023-24. That apart, RE for 2022-23 at Rs 2.25 lakh crore could be understating the actual outgo by at least Rs 25,000 crore – officials have all along been alluding to a figure of Rs 2.50 lakh crore. This shortfall representing carry-forward from 2022-23 will have to be paid from the budget provision for 2023-24.

The carry-forward is an accounting technique that was used by successive governments for decades to suppress fertiliser subsidy bills if only to show a better picture of the fiscal deficit. This practice was shunned by Modi-government during 2020-21 when leveraging lower subsidy bills for that very year (courtesy, low international fertiliser prices), it cleared all arrears. The actual subsidy expenditure was Rs 1.28 lakh crore against BE Rs 71,000 crore due to this decision.

Now, it seems that practice (read: carry-forward) has been revived, which would mean bloated payments during 2023-24. The actual could be touching Rs 2.50 lakh crore against BE of Rs 1.75 lakh crore.

Food subsidy is the excess of the minimum support price plus handling and distribution cost over the issue price of  Rs 3/2/1 per kg of rice/wheat/coarse cereals, respectively, to the beneficiaries under the National Food Security Act (NFSA) multiplied by the quantity. During 2022-23, RE at Rs 2.87 lakh was higher than BE Rs 2.07 lakh crore, as the free food scheme launched in April 2020 under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) was extended in an ‘unplanned’ manner. With the discontinuation of PMGKAY from January 1, 2023, the finance minister has reduced allocation for 2023-24 by Rs 90,000 crore. But it could be revived - as the election scenario unfolds.

Uttam Gupta is a policy analyst. Views are personal and do not represent the stand of this publication.