CENTRE SUBSIDY

1. Context 

2. Key points 

• The extra subsidy outgo, for which the Finance Ministry presented its first tranche of supplementary demand for grants includes Rs 109, 288.95 crores in fertilisers, Rs 80, 348.25 crore in food and Rs 24, 943.68 crores in petroleum.
• The Rs 532, 446.79 crores spending on Subsidy in 2022-23 would be the second highest after the Rs 706,006. 53 crores of 2020-21. However, there's a difference between 2020-21 and 2022-23.

3. 2020-21 Subsidies

• In 2020-21, the spike in subsidies was on account of the Finance Minister Nirmala Sitaraman making a one-time provision to clear all dues to the Food Corporation of India (FCI) and Fertiliser companies.
• The Centre, in previous years, was not providing fully for a subsidy, arising from these entities selling grain and fertilisers at below cost to PDS (Public distribution system) consumers and farmers respectively.
• Not wholly funding the difference and on time forced them to borrow, with FCI alone availing loans from the National Small Savings Fund (NSSF) at 7.4-8.8 Per cent interest during 2016-17 to 2019-20.

4. Final subsidy provision

• The final subsidy provision of Rs 706, 006. 53 crores (as against the originally budgeted Rs 227, 793.89) helped FCI repay Rs 339, 236 crores of outstanding NSSF loans and also clear the fertiliser industry's subsidy arrears.
• This exercise of coming clean-the Centre owing up to its expenditures, rather than transferring to the balance sheets of FCI and fertiliser firms led to a spiralling of the subsidy bill.
• The latter constituted 43.2 per cent of the Centre's revenue receipts and 20.1 per cent of its total expenditure in 2020-21.

5. Different in 2022-23

• The overshooting of subsidies, both in 2022-23 and 2021-22 (the budget estimate was Rs 336, 439.03 crores, against the provisional final of Rs 446, 047. 72 crores) has been largely courtesy of Covid-19 and the Russia-Ukraine war.
• The pandemic resulted in record offtake of rice and wheat through the PDS-92.88 million tonnes (mt) in 2020-21 and 105.61 mt in 2021-22 under various welfare schemes, notably the free-grain Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).
• The latter was implemented for eight months (April-November) in 2020-21 and 11 months (May March) in 2021-22 and extended for another nine months in the current fiscal (April-December).
• The additional food subsidy spending for which authorisation is now being sought would mainly go to meet the cost of PMGKAY in 2022-23.

• The maximum retail price of urea has not been raised, while not being allowed to go up much even for di-ammonium phosphate (DAP) India's second-most consumed fertiliser.
• Retail prices of petrol and diesel were last revised upwards on April 6 this year and reduced with effect from May 22 following cuts in excise duties.
• But insulating the farmer and consumer has also meant compensating fertiliser and oil marketing companies (OMCs) for selling below cost or under-recoveries.
• That has, of course, added to the government's subsidy burden.

6. 3F subsidies

6.1 Food

• Public rice and wheat stocks at 55.31 mt on November 1, are the lowest for this date in five years and might not permit further extension of the free-grain scheme.
• Low stocks will also reduce the FCI's carrying cost of grain, helping to further prune the Centre's food subsidy bill.

6.2 Fuel

• In fuel, international prices of petrol (Singapore Gasoline) and diesel (Arab Gulf Gasoil) have eased from their June 2022 average peaks of $148.82 and $170.92 per barrel to $84.92 and $106.48 respectively now.

• In other words, the OMCs are making money and probably being allowed, to recoup past losses.
• The Rs 24, 943. 68 crores subsidy authorisation sought under the present supplementary demand for grants is to cover their under-recoveries only in domestic LPG operations, not on petrol and diesel sales.

6.3 Fertiliser

• Coming to fertiliser, Table 2 gives monthly average "pooled" prices of domestic and imported re-gasified liquefied natural gas delivered to urea plants on a gross calorific value (GCV; the total heat released by the combustion of a unit of fuel) basis.
• The Current Price of Rs 1, 899.37 per million metric British thermal units (mmBtu) translates into Rs 2, 110. 41 on a net calorific value (NCV, Which excludes the heat in the water vapour produced during combustion and 90 per cent of GCV).
• Every mmBtu of gas generates 0.25 giga-calories (GCal) of energy, with an average of 5.8 GCal required for producing one tonne of urea.
• At existing gas prices, the feedstock cost alone will then come to around Rs 48, 961.5 per tonne of urea.
• One year ago, when the pooled gas price was Rs 1,132. 58/mmBtu, the corresponding feedstock cost would have been only Rs 29, 195.4 per tonne.
• From the table, some softening of gas prices can be seen in recent months.
• This has been aided by a weakening of global crude prices and the US dollar coming off its September highs.
• Landed prices of imported fertilisers have also fallen, to $550-600 per tonne (from $900-1,000 in December-January 2021-22) for urea and to $700-720 (from $950-960 in July) for DAP.

7. Overall subsidy savings

• The food subsidy outgo for the coming fiscal is likely to be contained within Rs 200, 000 crores.
• The same should not exceed Rs 150, 000 crores for fertiliser and Rs 25, 000 crores for petroleum assuming no new geopolitical, climate or pandemic shocks.
• In all, there could be upwards of Rs 150, 000 crores in subsidy savings.

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