The fiscal deficit has increased by 4.7 per cent of GDP, but the stimulus is less than 1.2 per cent of GDP. There is also a small question of the missing Rs 112,000 crore.
The Budget has come and gone, and if you missed it, you missed nothing. But it did provide heretofore unpublished data on subsidies, expenditures and taxes, and for that one is grateful. But these data raise some important issues pertaining to subsidies, stimulus and the fiscal deficit. Indeed, one question raised is about some missing money, present in the official expenditure statement, but not to be found (by me at least). The money missing is “about” Rs 112,000 crore or more than 2 per cent of GDP! Perhaps, or rather certainly, I have committed some grievous error. But hard as I try, I can’t find it; hence, I would appreciate being corrected.
One of the key factors facing analysts, market watchers and especially the pink papers, is the size of the Indian fiscal deficit. Nowhere else do the fiscal experts have so much space, so much elbow room to flex their righteous muscles. This article is for them — maybe they can help me out.
But first some comments on the confusion between the fiscal deficit and a fiscal stimulus. Most of the time, changes in the deficit do imply changes in the stimulus. But for the umpteenth time, 2008 was not an ordinary year. It was marked by both the highest inflation and the lowest inflation in the world — India not excluded. It was also marked by the fastest change in the value of the rupee, ever. (This excludes government-induced policy devaluations.) In this environment, when the international price of oil increases and the domestic price of oil is kept the same by subsidizing consumption, then for sure the fiscal deficit goes up by the amount of the extra subsidy. But does this loss mean stimulus to the consumer or the economy? Certainly not.
It is with this perspective that the increase in the fiscal deficit needs to be looked at. Excluding the state deficit (assumed to stay the same for the two years), the total fiscal deficit in the economy increased from 3.1 per cent in 2007/8 to 7.8 per cent in 2008/9, an increase of 4.7 per cent of GDP. This increase, at face value, supports the contention of the government and various fiscal experts that there is no need for further fiscal stimulus. But 2.5 per cent of GDP (or Rs 135,000 crore) is on account of subsidies for food, fertilizer and oil. So the net stimulus is only 4.7 minus 2.5 or 2.2 per cent. To the extent domestic prices were raised (price of fuel goods increased by about 8 per cent in 2008/9), the actual stimulus is even less than 2.2 per cent. Subtract from this 1 per cent of GDP for Pay Commission awards and the farm loan waiver (announced well before the crisis and at the time the government, or at least its sister agency, the RBI, believed that the economy was overheating), and the total stimulus provided by the UPA government is a paltry 1.2 per cent of GDP. This when the country is faced by its most important growth crisis, and even the fiscal police at the IMF are calling for a minimum of 2 per cent fiscal deficits.
Missing Money
The missing money is related to the numbers reported above. India runs an elaborate non-transparent system for deriving subsidies for oil and fertilizers. In the case of oil, the government first levies excise and customs taxes on oil, and then gives a subsidy to oil companies to sell oil at a price lower than the oil companies purchase price but considerably higher than the purchase price of oil. I know this is Kafkaesque, but so is the policy. Bottom line — oil is heavily taxed in India, not subsidized. Within the oil complex, petrol is taxed the most, diesel less, and there is a definite subsidy for kerosene and LPG.
This is all well-known and not of concern at present — except please, the government should make the system just a trifle more transparent. However, one advantage of this “black box” policy is that given knowledge of the changes in the rupee and the international price of oil and fertilizers, and given the size of the expenditures in 2007/8, one can derive what subsidy expenditures should be in 2008/9. The difference between what is and what should be is an estimate of the missing money. Before proceeding, one further note. This calculation assumes that the quantities of consumption, and the domestic price, stay the same for the two years 2007/8 and 2008/9. It is a reasonable and conservative assumption for our calculations since given growth slowdown conditions, the quantity is unlikely to have increased much, and certainly not as much as the 8 per cent increase in the domestic price of oil.
The table contains some surprising results. The domestic price of oil, in rupee terms, increased by only 18 per cent. International fertilizer prices appear to have declined less (than oil) and yield a 60 per cent increase. Given this increase, and the same level of consumption as last year, the total 2007/8 fertilizer subsidy of Rs 30,000 crore should be 60 per cent higher at Rs 48,000 crore. The oil subsidy should have increased by 18 per cent or moved from Rs 15,000 crore to Rs 18,000 crore in 2008/9.
| THE CASE OF THE MISSING MONEY AND MISSING STIMULUS (in Rs crore) | |||
| Budget 2007-08 | Revised 2008-09 | Increase | |
| SUBSIDIES | |||
| Food | 25,696 | 43,627 | 17,931 |
| Indigenous (urea) fertilizers | 11,400 | 16,516 | 5,116 |
| Imported (urea) fertilizers | 2,704 | 10,981 | 8,278 |
| Sale of decontrolled fertilizer | 8,347 | 48,351 | 40,004 |
| Petroleum subsidy | 2,840 | 2,876 | 36 |
| Subsidies not included above | 3,571 | 6,890 | 3,320 |
| Total (budget subsidy) | 54,558 | 129,243 | 74,685 |
| OFF-BUDGET EXPENSES | |||
| Fertilizer | 7,500 | 20,000 | 12,500 |
| Oil | 12,000 | 77,000 | 65,000 |
| Subtotal | 19,500 | 97,000 | 77,500 |
| Total Subsidies | 74,058 | 226,243 | 152,185 |
| Total Subsidies (fertilizer) | 30,000 | 96,000 | 66,000 |
| Total Subsidies (oil) | 15,000 | 79,000 | 64,000 |
| Actual Prices | 2007-8 | 2008-9 | % increase |
| Price of fertilizer($/ton) | 324.0 | 457.0 | 41.0 |
| Price of oil ($/barrel) | 82.0 | 85.0 | 3.7 |
| Price of Rs/$ | 40.1 | 45.5 | 13.5 |
| Price of fertilizer (in Rs) | 12,992 | 20,793 | 60.0 |
| Price of oil (in Rs) | 3,288 | 3,868 | 17.6 |
| Source: Expenditure Budget 2009-2010 for budget items | |||
The stated actual subsidy expenditures on fertilizer and oil for 2008/9 are Rs 96,000 crore and Rs 79,000 crore, respectively. The unexplained gap (96 plus 79 minus 48 minus 15) is Rs 112,000 crore. This is a large number. And there seem to be precious few explanations as to where this $21 billion went.
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The author is CEO of Oxus Investments and anchor of Tough Talk, a talk show on NDTV Profit;
surjit.bhalla@oxusinvestments.com