Even as the government finances are stretched over slower revenue collections and higher than expected expenditure commitments in a slowing economy, the Centre is likely to increase its subsidy commitments for fertiliser and petroleum sectors when it presents the Budget for 2019-20 on July 5.
Sources privy to the development said as much as Rs 20,000-25,000 crore additional allocation could be made towards fuel and fertiliser subsidy to partially bridge unpaid subsidy bill of previous financial year (FY19) that has been carried forward to the current financial year (FY20).
While Finance Minister Nirmala Sitharaman faces the challenge of limiting the subsidy bill in her maiden budget to contain fiscal deficit to elevated levels of 3.4 per cent of GDP (gross domestic product) in FY20, a slight increase could be considered to wipe out rollover of subsidy bill year after year to dress up the country’s finances.
The total gap in subsidy provided in the interim budget and required by fuel and fertiliser sector works out close to Rs 50,000 crore. But the budget may not provide for the entire subsidy gap and may just meet half of the additional needs while carrying forward the rest to next financial year.
The interim budget, presented in February by then Finance Minister Piyush Goyal, provided Rs 37,478 crore towards petroleum subsidy (that includes subsidy towards kerosene and domestic cooking gas) and Rs 74,986 crore for fertiliser subsidy.
The fertiliser subsidy bill overshot by around Rs 25,000 crore in FY19. This was rolled over to FY20. According to rating agency Icra, petroleum subsidy amount of Rs 16,700 crore has also been carried over to FY20, which, if remains uncovered in the Budget, would raise the interest cost for state-run oil marketing companies (OMCs) on higher working capital borrowings.
The situation on the subsidy front looks alarming. According to the latest government data, the Centre spent close to Rs 68,000 crore in subsidies in April. What is more worrying is that the two subsidies — petroleum and fertiliser — registered a sharp spike during this period. The government has spent close to Rs 5,000 crore of petroleum subsidy in the first month of FY20.
According to Icra, the gross under-recoveries (GURs) of OMCs is expected at Rs 25,900 crore for FY20 (assuming the average Indian basket crude price of $65 to a barrel and the forex rate at Rs 70 to a dollar). But there is likely to be a subsidy gap of Rs 9,000 crore in FY20 owing to the carry-over of Rs 16,700 crore subsidy from FY19.
For the fertiliser segment, the total subsidy demand for FY20 is expected at over Rs 1.1 lakh crore, including Rs 30,000 crore of subsidy carry=over from FY19.
The subsidy towards urea is under strain with the government using about Rs 11,000 crore in April itself, a multi-fold jump in the bill over the same month of FY19. The main reason has been non-revision of urea prices for the past several years.
The government is banking on additional funds flowing to it through Reserve Bank of India’s surpluses. A committee is currently looking at the matter and its report would be released soon.