India’s major subsidies bill balloons. And, it was set to happen

The underachievement of targets is a manifestation of an attempt by the ruling dispensation to artificially suppress the BE in order to show a better picture of the fiscal deficit in line with the pattern seen in the past. The jump in fertiliser subsidies shows the government’s inability to correctly assess likely movement in the global prices of fertilisers and fertiliser raw materials (FRMs) during the course of the year. Besides, the unwillingness of the political brass to increase the maximum retail price (MRP) of fertilisers, even by a small amount, makes sure that the actual subsidy payout always remains higher.    

In the case of food, the extension of the Pradhan Mantri Garib Kalyan Anna Yojana(PMGKAY) free ration scheme for another five years has come as a surprise and has increased the food subsidy bill. As for cooking gas, the increase in subsidyto beneficiaries under the Pradhan Mantri Ujjwala Yojna (PMUY) by Rs 100 percylinder, also driven mainly by political considerations in the current election season, has led to excess payments.     

Volatile Prices

The subsidy on each tonne of fertiliser produced (or imported) and sold is the difference between the cost of supply and MRP. The subsidy is paid to manufacturers or importers to cover the excess of the cost of production/import and distribution (or cost of supply) over a low MRP that they are directed by the Union government to charge from the farmers. For FY 2023-24, finance minister  Nirmala Sitharaman set the BE at Rs 1.75 lakh crore, Rs 79,000 crore lower than the RE of Rs 2.54 lakh crore for 2022-23. This was on the assumption that international prices of fertilisers and FRMs would decline drastically from the previous year’s high. The prices did decrease during the first quarter of the current FY but have since risen.  The price of urea declined from $636 per tonne in October 2022 to $333 in July 2023. Thereafter, it moved north and is currently at $411 per tonne.       

Normally, any effort at prudent fiscal management involves countervailing measures to offset the cost-push effect of an increase in international prices. One such measure could be an increase in the MRP of urea that hasn’t been touched for over two decades. Yet, in June 2023, the Modi government decided to continue its availability to farmers at the prevailing MRP of Rs 242 per 45 kg bag for another three years. The government’s efforts to plug leakage of subsidised urea (estimated at about 30 percent) by adopting various measures, including neem coating, haven’t delivered the desired results.  

Extension of Free Food Grain Scheme

Food subsidy is the excess of minimum support price (MSP) paid to farmers and handling and distribution costs over the heavily subsidised price of Rs 2/3/1 per kg for wheat, rice and coarse cereals, respectively paid by 820 million beneficiaries under the National Food Security Act (NFSA). In the budget for 2023-24, the finance minister had set the BE at Rs 1.97 lakh crore, down Rs 90,000 crore from the RE for 2022-23 of Rs 2.87 lakh crore.   

Apart from the regular NFSA allocation, the RE for 2022-23 included subsidy payments for distributing 5 kg of cereals per month for free to all 820 million people under the PMGKAY, a programme launched in April 2020 to deal with the situation triggered by the Covid-19 pandemic. The PMGKAY was withdrawn from January 1, 2023, and supplies under regular NFSA were made free. This arrangement runs till December 31, 2023.

By ending free supplies (albeit under PMGKAY) during April-December 2023, the government saved a lot of money. But this was partially offset by making supplies under the regular NFSA free. The extension of free supplies, which will continue during January-March 2024, will result in excess payment over the BE. The hike in the MSP for all 14 kharif crops by 5-10 percent, announced in June 2023, has also added to the subsidy payout.

The subsidy on cooking gas was pegged at Rs 2,250 crore in the BE, and was meant to give a subsidy of Rs 200 per cylinder to 96 million households
under the Ujjwala Yojna. The subsidy was increased to Rs 300 per cylinder from October 5, 2023. Besides, the government plans to provide an additional 7.5 million connections under the scheme. Both these post-budget decisions have led to excess payments.     

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