In the medium-term expenditure framework statement [MTEFS] – a statutory requirement under the Fiscal Responsibility and Budget Management Act [FRBM] [2003] – presented by Modi –government, the spend on fertilizer subsidy during 2018-19 and 2019-20 has been kept unchanged at Rs 70,000 crores being the provision in the budget for current year 2017-18. The allocation for food subsidy has been increased from Rs 145,000 crores during 2017-18 to Rs 175,000 crores during 2018-19 and further to Rs 200,000 crores in 2019-20.
These numbers are completely out of sync and in contradiction with the government’s commitment to ‘rationalize’ and ‘target’ both fertilizer and food subsidy [i.e. give these to the poor/deserving only] – made in successive budgets as well as the recommendations of high level committees viz. Expenditure Management Commission [EMC] under Dr Bimal Jalan, ex-governor, RBI and Shanta Kumar committee on restructuring of Food Corporation of India [FCI].
The subsidy represents the excess of the cost of production [CIF landed cost in case of import] and distribution over the maximum retail price [MRP] [‘issue price’ in case of food for sale from public distribution system (PDS)] multiplied by the quantum of production/imports. The subsidy will increase if either the cost increases or MRP/issue price is lowered or a combination of both.
For any given level of per unit subsidy, the aggregate subsidy will also go up if production/import increases. For instance, in fertilizers, when urea production increased by over 2 million tons in 2015-16 over 2014-15 [prime minister mentioned in his speeches – in the run up to assembly elections in Uttar Pradesh – as a major achievement of his government], this led to higher subsidy outgo. Likewise, in food, expanded coverage under PDS implies higher subsidy payment.
Under the extant dispensation of fixing MRP/issue price and determining cost for the purpose of reimbursing differential between the two [or subsidy], there is an inherent tendency for each to move in a manner as to lead to higher subsidy. Thus, successive political dispensations have kept MRP of urea unchanged for over one-and-a-half decade. Likewise, under Food Security Act [FSA], issue price of coarse cereals/wheat/rice is a ridiculous low of Rs 1/2/3 per kg.
As regards the cost, provision for reimbursement to manufacturers on ‘actual’ basis leads to an upward bias. Natural gas is the feedstock used in production of urea. Nearly one third of its requirement is imported as LNG [liquefied natural gas]. This comes mostly under long-term contracts of up to 25 years at higher price when compared to prevailing spot price. These contracts signed during 2003-2010 were riddled with irregularities leading to inflated payments to exporters and corresponding higher subsidy [last year, Modi – dispensation renegotiated a contract with Qatar to secure good price reduction but that was one-off event].
There are several other cost components in supply/distribution chain and treatment of each on actual basis triggers a never ending stream of attempts to ‘prove’ and ‘claim’ expenses instead of actually taking steps to reduce [in fact, there is no incentive for this as a manufacturer runs the risk of savings being mopped up]. The scenario in food is no better as handling, storage and distribution cost are reimbursed to Food Corporation of India [FCI] on actual.
The ‘subsidy push’ is generic to existing controls and will not go away till such time the system itself is dismantled. The proof of pudding is in eating. For instance, the so called Comprehensive New Urea Policy [CNUP] unveiled in 2015 merely tinkered with energy consumption norms [these are used for computing feedstock/fuel cost] and cost reimbursement to manufacturers for production above a threshold capacity. Consequent to these, saving in subsidy was a mere about Rs 1000 crores in an overall annual budget of Rs 70,000 crores.
If, the government is really serious about making a dent on subsidy, then it should dismantle these controls and give subsidy directly to target beneficiaries [read: the poor only] under a scheme of direct benefit transfer [DBT]. This will pave the way for many players [including private sector and foreign investors], increase supply, offer more choices and foster competition leading to lower prices for all consumers. The poor will get additional benefit under DBT.
Unlike the present dispensation wherein subsidy payment is on a rising scale ever or at best constant, the payout [albeit under DBT] will be ‘finite’ and ‘predictable’. In case of fertilizers, the new system will promote balanced nutrient use, higher crop yield, improvement in soil health and less damage to the environment.
In view of above, it can be safely surmised that reforms and a substantial reduction in subsidy go hand-in-hand. Considering that in the MTEFS, the government has retained fertilizer subsidy at the existing level and provided for steep hike in subsidy on food [from the present already high level], it follows that it has no plans at least until 2019-20 to implement reforms in these sectors.
Its relevant policy decisions are also in conformity with this lackadaisical approach. Thus, under the CNUP [2015], the government had frozen the MRP of urea at existing level for 4 years. Further, it decided to continue the new pricing scheme [NPS] – cost determination and subsidy payments are made under it – for that long. Both NPS and control on MRP are intrinsic to existing dispensation and since, these stay till 2019-20, it follows that latter won’t go away.
As regards DBT, in both fertilizers and food, the government is currently running pilot projects in select districts and it is unlikely that actual launch will happen before 2019. In any case, sans reforms [read: removal of controls and allowing pricing freedom], DBT is like ‘a human without soul’.
A billion dollar question is: why Modi is running away from reforms in these sectors? For an answer, we may have to wait till 2019 general elections are over!