Subsidies will derail fiscal deficit target

In the Union Budget for 2023–24, Finance Minister Nirmala Sitharaman has stuck to the fiscal deficit (FD) target of 6.4 per cent of GDP in the revised estimate for 2022–23. She has kept the target for 2023–24 at 5.9 per cent. However, payments on major subsidies such as fertilisers and food, which account for a significant share of the Union government’s total expenditure, could play spoiler.

Fertiliser subsidy—payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution of fertilisers over the low maximum retail price (MRP) fixed by the government—was budgeted at Rs 105,000 crore for the financial year (FY) 2022–23. This was a drastic cut over the actual or revised estimate (RE) of Rs 162,000 crore during 2021–22. This was done in the hope that fertiliser prices in the international market would decline drastically from the elevated levels of 2021–22.

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But that hasn’t happened; instead, prices have risen even further (due to the Ukraine war and the resulting disruption in global supplies). During the course of the year, mandarins in the department of fertilisers (DoF) were estimating the subsidy outgo during FY 2022–23 to be around Rs 250,000 crore. Against this, Sitharaman has kept the RE for the year at Rs 225,000 crore, thereby making an under-provision of Rs 25,000 crore. To this extent, she has suppressed the FD.

For 2023–24, she has allocated Rs 175,000 crore for fertiliser subsidies—a reduction of Rs 50,000 crore over the RE for 2022–23. With no end to the Ukraine war in sight and tight global supply conditions likely to continue till the end of FY 2023–24, fertiliser prices will remain elevated. As a result, the annual outlay would be significantly higher than Rs 200,000 crore. With carryover from the current fiscal year, the total could reach Rs 250,000 crore.

This being Rs 75,000 crore more than the budget estimate (BE) of Rs 175,000 crore would dent the ability of the government to achieve the FD target of 5.9 percent for FY 2023–24.

Coming to food subsidies—payments made to the Food Corporation of India (FCI) and other state agencies to cover the excess of MSP (minimum support price) paid to farmers and handling and distribution costs over the heavily subsidised sale price of Rs 2/3/1 per kg for wheat, rice, and coarse cereals to around 820 million people under the National Food Security Act (NFSA), against a BE of Rs 207,000 crore for FY 2022–23, the officials were estimating the actual outgo to be Rs 330,000 crore. This included the expenses on the supply of free food under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) during the first nine months, i.e., April 1–December 31, 2022.

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But Sitharaman has kept RE for FY 2022–23 at Rs 287,000 crore, implying an under-provision of Rs 43,000 crore. To that extent, she has suppressed the FD. For 2023–24, she has allocated Rs 197,000 crore—a reduction of Rs 90,000 crore over the RE for 2022–23. What could be the likely actual for the year?

On December 23, 2022, the Consumer Affairs, Food, and Public Distribution Minister Piyush Goyal announced the discontinuation of PMGKAY from January 1, 2023 and the merger of “the free part of PMGKAY with the regular NFSA.” The second decision means that 820 million beneficiaries under the NFSA will get free food instead of paying Rs 2/3/1 per kg for wheat/rice/coarse cereals, which they had been paying until Dec 31, 2022. The new arrangement will continue until December 31, 2023.

The shift from giving food at Rs 2/3/1 per kg to “free” would lead to an additional outgo of about Rs 13,000 crore. That apart, in view of impending elections during 2023/2024, the revival of PMGKAY is not ruled out; in any case, Modi is free to revive it for three months i.e. January 1 – March 31, 2024 (as the extant arrangement will end on December 31, 2023) which will entail additional spend of at least Rs 40,000 crore (since April 2020, the scheme ran for 28 months entailing a total expenditure of Rs 390,000 crore or Rs 14,000 crore a month; for three months it comes to over Rs 40,000 crore).

Together with carry forward from 2022–2023, the government could be staring at a shortfall of close to Rs 100,000 crore in food subsidies. Plus the likely slippage of Rs 75,000 crore in fertiliser subsidies, the actual FD for FY 2023–24 could be off by Rs 175,000 crore, or around 0.6 per cent of the GDP.

During 2020–21 and 2021–22, Modi’s government provided for all of the “actual” subsidy payments from the budget. For instance, during 2020–21, it gave Rs 525,000 crore for food subsidy, enabling FCI to even clear all the loans on its books. Then, it wasn’t hamstrung by fiscal discipline, with the FD in that FY being 9.3% (courtesy of the pandemic). Now, having to get back on the fiscal consolidation trajectory (as per the roadmap announced in the 2021–22 budget, it has to reach 4.5% by 2025-26), slippages are inevitable.

(The writer is a policy analyst.)