Are the govt's fuel subsidy woes over?

Mon, 27 May Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Lowering India's fiscal deficit - the difference between the government's total expenditure and its total receipts - has been high on the agenda of the Finance Minster. The fiscal deficit, which stands at nearly 5.3% of the country's GDP, is believed to have grown four-fold in a period of five years. To contain the spiraling effect as well as to avoid any deterioration in India's long-term rating, the government rolled out a fiscal deficit road-map for the 12th five year plan. The aim is to lower the fiscal deficit to nearly 3% of the GDP by 2016-17.

The government's plan includes lowering of revenue expenditures - expenses that will not in any way help in capital formation or add to the GDP growth. These largely include payment of salaries, interest and subsidies. Lowering of the latter is something that is very much required.

As reported by the Business Standard, the total fuel subsidy burden stood at Rs 1.6 trillion last year. This was shared by the government and upstream companies in the ratio of about 63% and 37% respectively. In the preceding two years, the total fuel subsidies stood at about Rs 1.38 trillion and Rs 0.78 trillion. In an attempt to curb these rising bills, which form a good chunk of expenses, the government had taken a few steps in the recent past - including increase in the fuel prices and phased decontrol of diesel prices. These efforts, coupled with lower crude price are expected to lower the subsidy bill for this year. Other measures such as the cap on subsidized cooking gas (LPG) as well as export parity pricing (which is still in debate) are also expected to help to lower the share of oil subsidy.

As reported in the business daily, the government is not expecting the total subsidy burden to cross Rs 800 bn. In other words, the same is expected to reduce by half as compared to last year's subsidy bill. Of this, one-fourth is expected to be contributed by the government. The balance, by the upstream companies. As such, the subsidy burden for the government is expected to fall by 80% from last year (from Rs 1 trillion or 63% of Rs 1.6 trillion).

If all goes as planned, this would be a very positive development for the government considering that subsidies form a huge chunk of the revenue expenditure. This would eventually lead to lesser borrowings by the government - 80% of which are used to fund revenue expenditures. Lesser borrowings by the government would leave more money for private sector to borrow, leading to better economic prospects. Having said that, one cannot ignore the key concerns of the rating agencies - which are to do with the fact that 2013, being an election year, one's expectations of curbing major expenditures or those of some major reforms should not be too high.