El Nino's potential impact on rabi crops overcasts govt's fiscal arithmetic

At first glance, it may appear that rising food inflation and potential populist measures ahead of the forthcoming elections could disrupt the Centre’s fiscal arithmetic for the current financial year. However, official numbers indicate that the situation is not yet alarming. Nonetheless, the looming threat of El Niño and its potential impact on rabi crops could turn the situation adverse in the latter part of the year.
 

Various measures implemented to control escalating food inflation, such as selling tomatoes and onions at subsidised rates, have not significantly increased government expenditure.
 

However, the reduction in prices of liquefied petroleum gas cylinders for domestic and commercial use may impose an additional burden on the exchequer. It is still not clear who will bear the burden of this price cut — the government or the oil marketing public sector units. It is understood that the government might give one time grant to these companies. Last year too, the government gave a one-time grant of Rs 22,000 crore to these three companies. However,  profits of these PSUs — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — have swelled in the first quarter of financial year 2023-24 (Q1FY24) and the trend is on, sources said.  OMCs have pegged the cost of cut in prices of domestic LPG cylinders at Rs 7,500 crore for the remaining part of this financial year.  
 

“The fiscal cost of combating high food inflation has been negligible thus far. The government may generate some revenue through the imposition of export duties on certain commodities,” noted former chief statistician Pronab Sen.
 

Last month, the government imposed a 40 per cent duty on onions and a 20 per cent duty on parboiled rice exports to ensure their availability for domestic consumption.
 

Food inflation rose to a three and a half year high of 11.51 per cent in July this year, compared to 4.31 per cent in the previous month. This increase can be attributed to rising prices of tomatoes, rice, wheat, jeera, and some pulses.
 

Food inflation was not this high even during the lockdown periods of the first Covid wave in 2020.
 

The burden on the government’s coffers may arise primarily from major subsidies, particularly food and fertiliser. If the government decides to extend the free foodgrain scheme beyond December this year, the burden on food subsidy could escalate.
 

The government’s expenditure might also swell if it chooses to increase the amount provided under Pradhan Mantri Kisan Samman Nidhi (PM Kisan) from the current Rs 6,000 per farmer.
 

Among major subsidies, the central government spent approximately Rs 68,594 crore on food subsidy in the first four months of 2023–24 (FY24), according to data sourced from the Controller General of Accounts (CGA).
 

This represents a 6.54 per cent increase compared to the corresponding period of the previous year.
 

This translates into a monthly food subsidy expenditure of approximately Rs 17,148 crore.
 

If the Pradhan Mantri Garib Kalyan Anna Yojana is extended beyond December, as is likely, the additional expenditure could rise by roughly Rs 12,500 crore for January–March of FY24 due to the difference between supplying foodgrains at public distribution system prices and providing them for free, according to some reports.
 

The Budget has estimated food subsidy at Rs 1.97 trillion for the current financial year. Raising the PM Kisan entitlement by an additional Rs 2,000 per farmer, beyond the Rs 6,000 distributed annually to nearly 90 million farmers, would result in an extra expenditure of approximately Rs 18,000 crore on top of the already budgeted Rs 60,000 crore in FY24.
 

Next comes the fertiliser subsidy.
 

CGA data reveals that actual spending on the nutrient-based subsidy (NBS) regime and urea subsidy has been significantly higher in the first four months of FY24 compared to the same period in the previous year. Expenditure is in the region of 112 per cent higher for NBS and almost 41 per cent higher for urea subsidy.
 

This increased expenditure occurred despite a considerable softening of global fertiliser prices since April. This was mainly due to the higher prices at which old stocks were imported.
 

Between April and July 2023, the landed price of di-ammonium phosphate (DAP) decreased by nearly 16 per cent, while that of urea declined by around 15.31 per cent.
 

Domestically, the cost of production has also decreased. The Centre’s NBS subsidy allocation for the April-September 2023 period for nitrogen is down by 81.08 per cent, phosphorus by 9.25 per cent, potassium by 61 per cent, and sulphur by 16.5 per cent.
 

However, there is a catch.
 

Global fertiliser prices, especially for DAP and urea, have started to rise since August due to China’s ban on DAP imports and increasing demand from countries like Brazil.
 

Market expectations are that both DAP and urea rates will continue to firm up, as they had reached multi-year lows in recent months.
 

In August, the landed price of DAP increased by 20 per cent compared to July, while urea prices rose by 30 per cent in the same period.
 

India annually consumes 30-35 million tonnes (mt) of urea, of which 7-9 mt are imported, while the domestic consumption of DAP is 10-12.5 mt, with local production accounting for 4-5 mt, and the rest imported.
 

Fertiliser demand typically peaks between April and June for the kharif harvest and October and December for the rabi sowing season.
 

DAP demand is higher during the rabi season, while nitrogen, phosphorus, and potassium consumption increases during kharif.

Will these price increases threaten fertiliser subsidies, which have already risen due to high-priced carryover stocks?
 

In response to this query, Ankit Jain, vice-president of ICRA, told Business Standard, “The government’s subsidy budget of Rs 1.75 trillion for FY24 is likely to remain adequate. Additionally, in the case of urea, India’s import dependence this year is expected to be lower than in previous years at 4-5 mt.”
 

Despite the rise in subsidies and committed spending on salaries and pensions under this head, revenue expenditure amounted to Rs 10.63 trillion in the April-July period of FY24, constituting 30.4 per cent of the budgeted Rs 35.03 trillion for the entire year.

This was higher than the 28.7 per cent recorded in the corresponding period of the previous financial year.
 

The increase in subsidies in the first four months may be primarily attributed to pending payments from the previous year. Sen noted that any increase in subsidies this year could be rolled over to the next year.
 

Mahendra Dev, former director of the Indira Gandhi Institute of Development Research and chairman of the Commission for Agricultural Costs & Prices, however, holds a different perspective on the question of inflation and populist schemes disrupting fiscal calculations.
 

“There is pressure on fiscal deficit due to giveaways by the Centre and states, and the combined deficit of both may be at risk. Unless, of course, there is a big cut in government expenditure, which is challenging in an election year,” said Dev.
 

As far as the Centre is concerned, its fiscal deficit of Rs 6.05 trillion in the first four months of the current financial year has already reached 33.9 per cent of the budgeted Rs 17.87 trillion for the entire year.
 

This deficit is significantly wider than the 20.5 per cent recorded in the April-July period of 2022–23, primarily due to front-loading of capital expenditure, tax devolution, subdued corporation tax and excise duty collections, and slow disinvestment proceeds this time. 
 

The government has projected its fiscal deficit to come down to 5.9 per cent of GDP in FY'24, down from 6.4 per cent in the previous year. The deficit stood at 6.4 per cent in Q1 of FY24.