Govt may not tweak food, fertiliser, oil subsidies

RUN-UP TO BUDGET 2005

Food subsidy bill may fall on lower borrowing costs.

Instead of announcing changes in the subsidy structure, the government is likely to reiterate its commitment towards better targeting of subsidies.

This is because the ground-level situation makes it difficult for the Centre to bring about immediate changes in food, fertiliser and petroleum subsidies.

The three subsidies, budgeted at Rs 42,021 crore for the current fiscal year, account for around 38 per cent of the Centre's explicit subsidy bill.

According to officials, the revised estimate for 2004-05 is, however, expected to show a saving of at least Rs 1,000 crore on food subsidy, budgeted at Rs 25,800 crore, while the petroleum subsidy will remain at Rs 3,559 crore.

But higher naphtha prices were expected to push up the Centre's fertiliser subsidy bill by 20 per cent against Rs 12,662 crore in the Budget estimate for the year, a finance ministry official added. The fertiliser department has sought a 40 per cent increase in the revised estimates.

Petroleum subsidy has already been capped at Rs 3,500 crore till 2007, after which it is slated to be phased out.

Officials said a large part of the reduction in the food subsidy bill was on account of lower borrowing costs, which had decreased from over 10 per cent in January 2004 to 8.15 per cent now. In addition, decentralised procurement and better management of food stocks have reduced the carrying costs.

Although a further reduction in borrowing costs had been proposed by the food department to a consortium of 60 banks, the Budget proposal of launching a system of food stamps on a pilot basis had not found any takers and with states turning down the proposal.

Recently, the food department also wrote to the finance ministry saying the idea had not taken off in other countries and it would lead to higher transaction costs.

Officials said the proposals contained in the finance ministry's report on subsidies might be difficult to implement because of political compulsions.

The report suggested revamping the minimum support price structure, suspending procurement once the pre-determined target was met and decentralising procurement, for which the process had already started. It also suggested checking leakages in the public distribution system, which is the responsibility of the states.

Similarly, in case of fertiliser subsidy the second stage of changes in the urea price mechanism is in place till March 2006. The government has constituted a committee headed by YK Alagh to suggest changes in the third round to be implemented from April 2006.

Officials said the government was not expected to change the policy at the moment and would instead wait till next year.

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Budgeting for sops

THE TALKING POINT: Subsidies in food, fertiliser and petroleum. The government may just reiterate its commitment towards better targeting of subsidies instead of changing them

THE OUTGO: The three subsidies, budgeted at Rs 42,021 crore for the current fiscal year, account for around 38 per cent of the Centre's explicit subsidy bill

The balance sheet

Food: In 2004-05, the government may save Rs 1,000 crore on food subsidy, budgeted at Rs 25,800 crore

Petroleum: The subsidy will remain at Rs 3,559 crore

Fertiliser: The subsidy bill may go up by 20 per cent against Rs 12,662 crore in the Budget estimate