In its second term, Prime Minister Narendra Modi-led NDA government may leave food, fuel and fertiliser subsidies unpaid to public enterprises, even this year.
In her maiden budget, Finance Minister Nirmala Sithraman said the government would adhere to FRBM targets of reducing fiscal deficit to 3.4 per cent this year and bring it down to 3 per cent by the 2020 fiscal.
To stick to this target, the government has been resorting to leaving food, fuel and fertiliser subsidies unpaid to public enterprises. The CAG, in a report in January, had stated that the government had left subsidy arrears in previous years unpaid and underestimated public expense by Rs 7.6 lakh crore.
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This, the CAG had said, was on account of high interest outflow on 'off-budget borrowings' that Food Corporation of India, oil PSUs and fertiliser companies had to resort to after subsidies were left unpaid.
This year the level of unpaid subsidy arrears are likely to balloon to Rs 2.6 lakh crore in the current year, government economists said. This would be largely driven on account of government's unpaid dues for the MSP procurement programme that benefits farmers and also for its rural irrigation scheme.
According to Food Corporation of India (FCI) officials, the budget said nothing about clearing Rs 32,000 crore dues in food subsidies last year, accrued from government's MSP based food crop procurement programme.
This year the FCI is likely to receive Rs 30,000 crore for paying its salaries and running its warehousing operations. This year's food subsidy is budgeted at Rs 1.84 lakh crore. "We may have to borrow again this year if previous year subsidies are not paid," said a government source. The FCI is to receive Rs 69,000 crore in food subsidies this year and a similar amount in arrears from previous two years.
"The government would roll over Rs 2.4 lakh crore unpaid subsidies for food, fuel and fertiliser to this fiscal" said the government source.
A collection shortfall of Rs 1.7 lakh crore in tax revenues last year had necessitated the government to take these measures of leaving unpaid subsidies, the official said.
This year, the government's expenses are likely to rise as the ruling Bharatiya Janata Party seeks to fulfil some of the welfare promises made in its 2019 election manifesto.
The government in last two years owed to both state-owned and private fertiliser companies, about Rs 112,000 crore in unpaid subsidies. The government estimated Rs 77,487 crore in fertiliser subsidy this year, up from Rs 74,986 crore it budgeted last year.
Subsidy dues of the three state-owned oil marketing companies — Indian Oil, Bharat Petroleum, and Hindustan Petroleum — is around Rs 63,100 crore. The interim budget had provided Rs 37,478 crore for petroleum subsidies, which was increased to Rs 39,231 crore this year.
Last years unpaid subsidy dues of the government, which would be rolled over to this year, would include Rs 81,456 crore for food subsidy, Rs 38,278 crore for fertiliser subsidy and another Rs 28,832 crore in fuel subsidy.
According to officials, the government would look for payment of some of these arrears by next January. The budget papers showed that the government also intended to repay Rs 100,000 crore of market borrowings that arose due to these unpaid subsidy arrears.
“There have been discussions on if a bulk of the pending payments can be cleared this year. But given the fiscal situation right now, that option isn’t there” said an official.
The government, other than off-budget borrowings, also dips into the National Small Savings Fund cash to fund these arrears. Officials said that food subsidy isn’t a problem as the FCI is also allowed to borrow a certain amount as off-budget resources.
According to official data, last year the government had increased the debt of the OMCs to a five-year high of Rs 1.62 lakh crore.
Oil PSUs' total debt now stands at a similar level, around Rs 33,900 crore. This was due to the government's delay in payment of subsidy on liquefied petroleum gas and kerosene.
Foreign ratings agencies also sounded caution on the government's larger dependence on off-budget borrowings and saw overall government expenditure to grow.
"The medium-term fiscal deficit targets of 3.0% deficits in FY21 and FY22 make it highly unlikely, in our view, that the debt ceiling of 60% for general government debt will be met by FY25, as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act," Fitch Ratings said in a post-budget report. The government had budgeted a Rs 27 lakh crore expenditure. In the budget, it had sought to enhance its debt to 60 per cent of this, and moderate debt level in 2021 and 2022 fiscals.
This could make Indian government securities less attractive for investors.
"We believe off-budget spending is likely to increase due to, for instance, the additional banking-sector recapitalisation, which is equivalent to 0.3% of GDP. This should not affect the deficit, but it will raise the debt level. Weak public finances are a key constraint on India's 'BBB-'/Stable sovereign rating," said Thomas Rookmaker, director, sovereigns, Fitch Ratings.
