The IndiaSpend Primer To Subsidies - I

The word ‘subsidy’ gets everyone worked up in India, except presumably those who are direct beneficiaries. More so since the quantum of subsidies doled out rises every year.

IndiaSpend’s Sourjya Bhowmick does a snapshot study of the major (defined) central subsidies that the Government of India hands out and looks for clues on where they might be headed next. Hint: power subsidies are falling, food and fuel subsidies continue to rise.

The Oxford Dictionary defines subsidy as: “a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.” India’s Planning Commission says: “Subsidies mean unrecovered costs of public provision of non-public goods”. To put a figure to this meaning; Budget 2012 has a subsidy amount of Rs 1,89,917 crore ($38 billion) or approximately 2.1% of GDP ($1.73 trillion).

In just 3 years, the Government of India has given out over Rs 4,72,299 crore (petroleum+ food+ fertiliser+ rural electrification) in cumulative subsidies. Now let’s look at the biggest subsidy heads;

Food Subsidy

Food subsidy falls under the Department of Food and Public Distribution, which in turn comes under the Ministry of Consumer Affairs, Food and Public Distribution. The Budget Estimates for 2012 is Rs 75,000 crore. This excludes the subsidy on maintenance of buffer stocks of sugar, which is Rs 17 crore.

The food subsidy goes towards reimbursing the difference between the ‘economic cost’ and the issue price of foodgrains, carrying cost of buffer stocks, subsidy to state governments who procure foodgrains for the central pool.

Other heads include subsidy to sugar mills, to the State Governments and Union Territories for the implementation of smart card delivery of essential commodities under the Targeted Public Distribution System (TPDS).

The table below shows the food subsidies over the last few years;

( Rs Crore)

Increase: (Revised Estimates- Budget Estimates)

Source: Union Budget

The cumulative food subsidy for the last 5 years (budget estimates) have been Rs 2,76,308 crore. Incidentally, a huge chunk of this money goes to the FCI, which is a loss making body.

Fertiliser Subsidy

The next in terms of size is the total subsidy on Fertilisers. This subsidy is budgeted to the Department of Fertilisers, which falls under the Ministry of Chemicals and Fertilisers. For Budget 2012, the total amount allocated was Rs 60,974 crore.

The Fertiliser Subsidy is divided into three parts. Firstly, there is import of fertiliser to arrange for shortfall. The Government sells the imported fertiliser to farmers at the same price as that produced indigenously. So the difference between the total cost of imports, which includes distribution also handling cost as well and the selling price, is borne by the Government as subsidy.

Second, payment is made to manufacturers, importers of fertilisers so that they sell the fertiliser at a concessional rate to the farmers. This scheme is known as the Nutrient Based Subsidy (NBS) and theoretically it is expected to lead to balanced use of fertilisers, in turn ensuring soil productivity.

Third, subsidy is given for the production of urea under the New Pricing Scheme (NPS) and it includes freight charges as well.

The table below shows the fertiliser subsidy over the last few years;

( Rs Crore)

Increase: (Revised Estimates- Budget Estimates)

Source: Union Budget

For a better understanding let’s give you the breakup of different forms of subsidies this year. The total subsidy was Rs 60,974 crore. Of this total amount, Rs 13,398 crore went to subsidy on import, Rs 28,576 crore to the different manufactures/agencies/ importers and Rs 19,000 crore for the New Pricing Scheme.

The fertiliser subsidy too is rising every year. And the Revenue Estimates are much higher than the Budget Estimates. The cumulative expenditure since 2009 has been Rs 2,04,985 crore.

Petroleum Subsidy

Next in line is the Ministry of Petroleum and Natural Gas. This year’s budget allocated Rs 43,580 crore as subsidy to this Ministry for the year 2012-13. Of this, Rs 3,050 crore is the subsidy on LPG and Kerosene for PDS; Freight Subsidy is Rs 26 crore and Rs 504 crore is provided to oil companies for supply of natural gas to the North East region.

The Rs 40,000 crore is given as compensation to oil companies for ‘under-recoveries on account of sale of sensitive petroleum products’. According to the explanation given in the Budget documents, “The Government insulates the common man from the full impact of the international oil prices and domestic inflationary conditions, and moderates the retail selling, which leads to losses suffered by the companies."

The table shows the total subsidy in this Ministry over the last few years and includes all the entities;

(Rs Crore)

Increase: (Revised Estimates- Budget Estimates)

Source: Union Budget

In the year 2011-12, the compensation to oil companies increased from Rs 20,000 crore in Budget Estimates to Rs 65,000 crore in the Revised Estimates. In the year 2010-11, the compensation was not budgeted at first but a sum of Rs 35,000 crore was added later.

The total amount so far has been Rs 1,50,477 crore (R.E. of 2010-12 and the B.E. of this year).

Meanwhile, the under-recoveries of the oil companies have been increasing. Latest figures released by the Government state that Rs 1, 38,541 crore (diesel+ kerosene+ LPG) has been the total under-recovery during 2011-12. The under-recovery figures for Petrol have not been reported for 2011-12. The total under-recovery for oil companies in 2010-11 was Rs 78,190 crore (with under-recovery of Petrol calculated upto June 25, 2010). The under recovery for diesel during 2010-11 was Rs 34,706 crore, it rose to Rs 81,192 crore during 2011-12. This is the highest it has been in two years.

Power Subsidy

Budget 2012 provides just one subsidy for the Ministry of Power which is for rural electrification under Rajeev Gandhi Grameen Vidyutikaran Yojana (RGGVY), introduced in April, 2005.

This scheme aims to provide electricity to all un-electrified Below Poverty Line (BPL) households free of cost. In 2012, the subsidy for the programme is Rs 4,410 crore.

The target for 2012-13 is to electrify 4,800 un-electrified villages and provide electricity connections to 3.4 million BPL households. 90% is capital subsidy of the total financing. A part of this subsidy for RGGVY is met from the National Investment Fund.

The table below shows the total subsidy given to the RGGVY programme over the last few years;

(Rs Crore)

Increase: (Revised Estimates- Budget Estimates)

Source: Union Budget

The RGGVY subsidy as evident from the table is decreasing every year. The total budgeted amount since 2008-09 to the Budget 2012 is Rs 21,944 crore. Much of this is budgeted from the National Investment Fund.

Other Subsidies

The Railways, considered to be suffering from fund deficit gets Rs 3,604 crore as subsidy. Rs 3,004 crore is provided towards dividend reliefs and other concessions from the general revenues by the Department of Economic Affairs, Ministry of Finance. Rs 600 crore is reimbursed to the railways due to operating on Strategic Railway Lines.

The Department of Commerce, Ministry of Commerce gets Rs 2,300 crore as Export Subsidy, which is Rs 1,300 crore and Interest Subsidy to banks which is Rs 1,000 crore. Both of these subsidy fall under the head of ‘assistance for export promotion and market development’.