Real fertiliser & petro subsidies would have pushed fiscal deficit up: Analysts

NEW DELHI: Underbudgeting for fertiliser subsidies may be a key reason Finance Minister Pranab Mukherjee managed to show lower net borrowings and a fiscal deficit of only 4.6% for the coming fiscal against widespread expectations of 5%.

Analysts contend that the governmetn's fiscal deficit level would be much higher if real fertiliser and petroleum subsidies were factored in and higher still if the carry over fertiliser subsidies of 2010-11 were calculated for the
coming fiscal.

"The lower fiscal deficit number was achieved primarily by under budgeting for fertiliser and petroleum subsidies. We estimate a fiscal deficit of 5.2% with realistic subsidy estimates. However the fiscal deficit stands revised to 5.5% of GDP if we include the carried forward fertilizer subsidy of Rs 280 billion of FY11 in our estimates for FY12. The gross borrowing for FY12 should be in the range of `Rs 4.5 to 4.7 trillion.

The government needs to urgently push for deregulation of urea and diesel prices along with some other measures, to actually achieve a fiscal deficit within the 5% limit," maintained commodity analyst Tarun Surana of Sunidhi Securities who specialises in the fertiliser sector.

He contends that the borrowings for FY11 could have been lower by Rs 400 billion (including `200 billion, the built up in cash balance in FY11 end) resulting into a lower fiscal deficit of 4.6% in FY11 instead of 5.1% as reported. Thus, the surplus of current year could be used in 2011-12 to achieve the fiscal deficit target of 4.6%.

Subsidy levels for 2011-12 are likely to be higher than expected earlier after the government was forced, earlier this month, to revise upward the concessions to companies for key decontrolled fertilisrs such as DAP and MoP after having slashed this down to lower than 2010-11 levels despite much higher global input prices, mainly with an eye on cutting overall fertiliser subsidies now pegged (RE 2010-11) at Rs 550 billion (Rs 55,000 crores) Budget estimates for the coming fiscal peg this, ironically, at an n even lower Rs 50,000 crore comapred to a BE of Rs 52,837 crore for 2010-11.

"It would be interesting to investigate how the government keeps fiscal deficit under check in a year by spilling over its payment obligations to the next year and rolling some of them year after year." Taxindiaonline.Com consulting editor Naresh Minocha, who specialises in the fertiliser sector, contends. Writing for the website, he emphasized "Oil companies can draw solace from the fact that at least they periodically get bonds against which they can raise fresh debt.

Fertilizer companies have to live with carry-over of subsidy arrears by the government to the next year’s budget year after year. They offset the resulting liquidity crunch by raising additional working capital from banks." The fertilizer department has asked for Rs 82,245 crore in subsidy for 2010-11, which is around Rs 30,000 crore more than the budgeted sum of Rs 52,837 crore and Rs 27,000 crore higher than the RE of Rs 55,000 crore.

This put the finance ministry, already facing surge in oil subsidy, in a tight spot. and left a carry over subsidy of well over Rs 20,000 crore for the fertiliser companies to put up with. Subsidy outgo on fertilizers in 2009-10r had increased to over Rs 65,000 crore from a budgeted figure of around Rs 45,000 crore.

The "unrealistically" low subsidy/concession levels announced for key decontrolled ferts including DAP and MoP besides controlled fertuiliser Urea for 2011-12 was put to hard test, contends an official of industry body Fertiliser Associaiton of India (FAI), when the fertiliser companies failed to clinch key long term supply contracts for the summer sowing season by end January.

Recognising finally that not hiking subsidy levels for both decontrolled ferts and for urea in view of soaring international prices for raw materials and inputs could jeopardise timely availability of fertilisers for the crucial kharif sowing season, the Centre revised its Novermber 2010 decison to cut subsidies across the board.

Significantly, not doing this on time could have impacted the food subsidy bill as well and translated to higher borrowings and fiscal deficit for the government. Food subsidy for 2011-12 is seen at about Rs 60,570 crore compared
to Rs 60,600 crore (RE 2010-11).