Centre’s subsidy bill 2022

Why in News?

• The government recently sought Parliament’s approval for an additional Rs 2.14 lakh crore as supplementary demands for grants towards major subsidies, over and above the Rs 3.17 lakh crore budgeted for 2022-23 (April-March).
• If passed by both Houses, it will take the total subsidy bill to Rs 5.32 lakh crore, which would be the second highest after the Rs 7.06 lakh crore of 2020-21.
• As the extra subsidy outgo will shoot food, fertilizer and petroleum subsidy to Rs 2.87 lakh crore. Rs 2.14 lakh crore and Rs 30,756.18 crore respectively, the article brings out the underlying reasons for hike in subsidies and estimates for next fiscal.

Image Caption: Statistics of Centre’s Subsidies

 

What is Supplementary Demand for Grants

• About: It is needed for government expenditure over and above the amount for which Parliamentary approval was already obtained during the Budget session.
• Constitutional provisions: Article 115 provides for the supplementary grants along with additional or excess grants.
• Procedure: When grants authorized by the Parliament, fall short of the required expenditure, an estimate is presented before the Parliament for Supplementary or Additional grants before the end of the financial year.
  • The Comptroller and Auditor General of India (CAG) bring such excesses to the notice of the Parliament.
  • The Public Accounts Committee examines these excesses and gives recommendations to the Parliament.

 

What are the reasons for subsidy hike in 2020-21?

• In 2020-21, the spike in subsidies was on account of making a one-time provision to clear all dues to the Food Corporation of India (FCI) and fertilizer companies.
  • This is because, the Centre, in previous years, had not wholly funded the difference arising from these entities selling grain and fertilizers at lower cost to PDS (public distribution system) consumers and farmers respectively.
  • These entities were thus forced to borrow. For example, FCI alone availed loans from the National Small Savings Fund (NSSF) at 7.4-8.8% interest during 2016-17 to 2019-20.
• The 2020-21 subsidy provision thus helped FCI repay its outstanding NSSF loans and also clear the fertilizer industry’s subsidy arrears which led to a spiraling of the Centre’s subsidy bill.

 

What are the reasons for subsidy hike in 2022-23?

• Shooting food subsidy: The food subsidies is likely to increase by 30% over the Rs 2.8 lakh crore ($25.14 billion) estimated in the budget, owing to following reasons:
  • The pandemic resulted in record offtake of rice and wheat through the PDS, i.e. 92.88 million tonnes (mt) in 2020-21 and 105.61 mt in 2021-22 under various welfare scheme.
  • For instance, the total cost of free-grain distribution by Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) since its launch in 2020 till December 2022 will be ₹3.91 lakh crore.
  • The present authorization is being sought for additional food subsidy spending to meet the cost of PMGKAY in 2022-23.
• Fertilizer subsidy: The fertilizer subsidy bill is expected to be over ₹2.5 lakh crore, for the latest tranche for the winter-sown season (October to March), way higher than the budget estimate of ₹1.05 lakh crore.
  • A key reason for the record fertilizer subsidy this year is higher prices of liquefied natural gases (LNG – Russia a major exporter), a critical input for the manufacturing of nutrients such as urea.
  • According to the Fertilizer Association of India, India’s annual consumption of fertilizers in 2021-22 stood at 32.54 mt, against 29.37 million in the previous fiscal, recording a growth of 10.8%.
  • Thus, the Cabinet Committee on Economic Affairs recently approved an additional ₹51,875 crore subsidy for phosphatic and potassic (P&K) fertilizers for the rabi season, amid high global prices.
  • Also, the maximum retail price of urea hasn’t been raised and minimally hiked even for di-ammonium phosphate (DAP), India’s second-most consumed fertilizer.
• Petroleum subsidy: The higher subsidy outgo in petroleum has been due to surge in global prices from September-October 2021, especially after the Russian invasion of Ukraine.
  • Hence, the government is cushioning consumers from the global supply demand shock.
  • The retail prices of petrol and diesel were last revised upwards in April 2022 and then reduced later following cuts in excise duties.
  • Cushioning consumer also meant compensating oil marketing companies (OMCs) for selling below cost or under-recoveries, and this has added to the government’s subsidy burden.

 

What are the future prospects related to subsidies in 2023-24?

• Food subsidy: The government is unlikely to extend PMGKAY beyond December 2022 owing to little political ramifications.
  • Moreover, public rice and wheat stocks (55.31 mt as of November 2022) are the lowest in five years which might not permit further extension of the free-grain scheme.
• Fuel subsidy: Owing to the eased international prices of petrol (Singapore Gasoline) and diesel (Arab Gulf Gasoil), it may translate into lower petrol and diesel prices in India.
• Fertilizer subsidy: At existing gas prices, the feedstock cost is likely to come down. Also softening of gas prices in recent months aided by a weakening of global crude prices and the falling US dollar has led to fall in prices of imported fertilizers like urea and DAP.
  • Feedstock: The urea is obtained from various raw materials such as natural gas, synthetic ammonia and carbon dioxide, or occasionally coal and these raw materials are called as “feedstock”.

 

Overall expected subsidy savings

• The food subsidy outgo for the coming fiscal (2023-24) is likely to be contained within Rs 2 lakh crore.
• Assuming no new geopolitical, climate or pandemic shocks, the fertilizer and petroleum subsidy is expected not to exceed Rs 1.5 lakh crore and Rs 25,000 crore respectively and there could be upwards of Rs 1.5 lakh crore in subsidy savings.

 

Conclusion

With current hikes in the subsidy bill, the government needs to maintain a fine balance between the imperatives of fiscal consolidation and electoral politics to put minimum strain on the federal budget and to meet the budgeted fiscal gap of 6.4% of gross domestic product (GDP).

 

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Q1) What is nutrient-based subsidy?

The Nutrient-based Subsidy Scheme provides subsidies for all non-urea-based fertilizers. It was created to encourage soil-balanced fertilization to increase agricultural productivity leading to improved farm returns.

 

Q2) Which Ministry launched PM Garib Kalyan Yojana?

The program is operated by the Department of Food and Public Distribution under the Ministry of Consumer Affairs, Food and Public Distribution. But the nodal ministry is Ministry of Finance.

 

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Source: How high the Centre’s subsidy bill could go this year