India
performs fiscal deficit
magic By Kunal Kumar Kundu
The half-yearly (April-September 2012)
fiscal deficit number for India for the fiscal
year running to next March, released by the
Controller General of Accounts (CAG) on October
31, shows an interesting twist in the tale.
According to the data, India's cumulative
deficit for the first six months actually fell as
compared with the cumulative deficit of the first
five months of the fiscal year (FY13). The deficit
fell by 6.34 billion rupees (ie there was a
surplus in September) to 3,369.04 billion rupees
(about US$62 billion) from 3,375.38 billion
rupees. Given the budgeted target of a fiscal
deficit of 5,135.90 billion rupees for the full
fiscal year, the cumulative deficit for the first
six months turned out to be 65.6% of the target, a
tad lower than the
65.7% recorded during the
April-August '12 period.
How did the
government manage the impossible of recording a
surplus during September? A closer look reveals
that the government has not paid any oil subsidy
so far for FY13 and has thereby managed to show
lower expenditure and hence a surplus for the
month. This, therefore, ought to be construed as
an accounting jugglery rather than any real
improvement in the state of finance of the
government.
But before that, a bit of
background is necessary. As per the calculation of
the Petroleum Planning & Analysis Cell (PPAC),
total under-recovery of the subsidy by the
country's three oil marketing companies (OMCs) -
Indian Oil Corporation Ltd (IOCL), Bharat
Petroleum Corporation Ltd (BPCL) and Hindustan
Petroleum Corporation Ltd (HPCL) during FY12 was
to the tune of 1,385 billion rupees.
Out
of this, the government forced the upstream oil
companies - Oil & Natural Gas Corporation Ltd
(ONGC), Oil India Ltd (OIL) and Gas Authority of
India Ltd (GAIL) - to bear close to 40% of the
under-recovery during FY12, which is quite close
their highest ever share of subsidy burden, the
41.5% imposed on these companies during FY11
(about 540 billion) during FY12.
Source: Internet
sources
On the other hand, the
government's share of under-recovery was pegged at
835 billion rupees.
However, out of this, the government paid
out only 450 billion rupees during FY12 and the
balance of 385 billion rupees was paid out only in
FY13. The problem is, during FY13, the government
has made a total provision of 436 billion rupees
as oil subsidy, as per the budget document. Hence,
out of the total budget provision for FY13, the
government used up close to 90% of the budgeted
amount to pay for the previous year's subsidy.
Essentially, the government resorted to borrowing
from the future to mange current expenditure.
Thus, for FY13, the government is left
with a budgeted oil subsidy of a mere 50 billion
rupees. Hence the pressure on the government
finances for the current year will be immense. The
fact is, the budget for oil subsidy during FY13
itself was highly under-estimated. As per the
estimate made by PPAC, the total under-recoveries
during the first six months of the current
financial year itself stood at 856 billion rupees
- virtually double the target for the full year.
However, the government is left with a mere 50
billion rupees as budgeted amount to be used for
oil subsidy for FY13.
On the other hand,
the politically hamstrung government continued to
dilly-dally on the oil price rationalization
front. It even went on to reject the Kelkar
committee (instituted by the Finance Minister P
Chidambaram himself) recommendation of time-bound
phasing out of subsidies on grounds of social
justice.
Though Chidambaram recently
announced a new fiscal consolidation roadmap in
which he assured that he will accept the Kelkar
Committee recommendations, finer details are
awaited as to what exactly are his plans. In the
meanwhile, the only form of subsidy reduction that
was visible was a mere 5 rupees per liter hike in
diesel price in September.
While this
reduced the under-recovery of diesel from 12.76
rupees liter as on August 16 to 9.84 rupees per
liter as on November 1, the subsidy burden has
been rising ominously, especially in case of
kerosene and domestic LPG.
In fact, the OMCs are now (as of
November 1) incurring a daily under-recovery of
4.21 billion rupees on the sale of diesel, PDS
kerosene and domestic liquefied petroleum gas
(LPG) while it was 4.05 billion rupees per day as
of August 16, before the hike in diesel price.
With the government aiming to cap the
subsidy at 5.3% of gross domestic product (GDP)
during FY13 (as against the budget of 5.1% of GDP
- as per its fiscal consolidation roadmap), it
opted for an easy way out by not paying out the
subsidy rather than surprising the market by
showing a surge in fiscal deficit.
* - assuming the share
of upstream oil companies remain the same at 40%.
Source: PPAC
If, on the other hand,
the government had paid the subsidy due to the oil
companies, the fiscal deficit would have shot up
to 3,889 billion rupees (approximately 75% of the
budget) during the first half of FY13, as against
68% of the budget recorded during the same period
in the previous financial year.
Clearly,
the issue of subsidy will be India's biggest
bug-bear while the country aims to achieve some
semblance of fiscal consolidation.
Kunal Kumar Kundu is Senior
Economist & GM, India, at Roubini Global
Economics. The views are those of the author.
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