Vivek Kaul
The Congress party led United Progressive Alliance(UPA) has been in the habit of shooting messengers who come with bad news. So here is some more bad news.
Almost half way through the financial year 2012-2013 (i.e. the period between April 1, 2012 and March 31, 2013), the fiscal deficit of the government is looking awful to say the least. Fiscal deficit is the difference between what the government earns and what it spends.
When the finance minister presents the annual budget there are a lot of assumptions that go into the projection of the fiscal deficit.
The overall fiscal deficit was projected to be at Rs 5,13,590 crore. The expenditure of the government for the year was expected to be at Rs 14,90,925 crore. In comparison the government expected to earn Rs 9,77,335 crore during the course of the year. The difference between the earnings of the government and its expenditure came to Rs 5,13,590 crore and this is the projected fiscal deficit. Hence, the government was spending 55% (Rs 5,13,590 crore expressed as a percentage of Rs 9,77,335 crore) more than it earned.
The expenditure part of the calculation includes subsidies on oil, fertiliser and food. The subsidy on oil was assumed to be at Rs 43,580 crore. This subsidy was to be used by the government to compensate oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and cooking gas, at a loss.
The government has more or less run out of the budgeted oil subsidies. It has already paid Rs 38,500 crore to OMCs, for selling diesel, kerosene and LPG at a loss during the last financial year. This amount was reimbursed only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for this year. This leaves only around Rs 5,080 crore with the government for compensating the OMCs for the losses this year.
And that’s just small change in comparison to the losses that OMCs are expected to face for selling diesel, kerosene and LPG. The oil minister Jaipal Reddy recently said that if the current situation continues the OMCs will end up with losses amounting to Rs 2,00,000 crore during the course of the year.
As economist Shankar Acharya wrote in the Business Standard on September 13“The real fiscal spoilsport is, of course, subsidies, especially those for diesel, LPG and kerosene, though those on fertiliser and foodgrain are also large. Data circulated by the petroleum ministry indicate under-recoveries by oil marketing companies (OMCs) of Rs 17/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG.”
The OMCs need to be compensated for these losses by the government because if they are not compensated then they will go bankrupt. And if they go bankrupt then you, I and everybody else, won’t be able to buy petrol, diesel, kerosene and LPG, which would basically mean going back to the age of tongas and bullock carts. Clearly no one would want that.
So to deal with expected losses of Rs 2,00,000 crore the government has around Rs 5,080 crore of the budgeted amount remaining. This means that the government would have to come up with around Rs 1,95,000 crore from somewhere.
This is a large amount of money. The government has tried to curtail these losses by increasing the price of diesel by Rs 5 per litre and thus bringing down the loss on sale of diesel to Rs 12 per litre. This move is expected to save the government Rs 19,000 crore which means losses will now amount to Rs 1,76,000crore (Rs 1,95,000crore – Rs 19,000 crore) in total.
Since 2003-2004, the government has had a formula for sharing these losses. The upstream oil companies like ONGC and Oil India Ltd, which produce oil, are forced to share one third of the losses. But there have been instances when the formula has not been followed and the upstream companies have been forced to chip in with more than their fair share. In 2011-2012, the last financial year the government forced the upstream companies to compensate around 40% of the total losses.
If the government follows the same formula this year as well, it would mean that the upstream companies would have to compensate the OMCs to the tune of Rs 70,400crore (40% of Rs 1,76,000 crore). Now that is a huge amount, whether the upstream companies have the capacity to come up with that kind of money remains to be seen. But assuming that they do, it still means that the government would have to come up with Rs 1,05,600 crore (60% of Rs 1,76,000 crore) from somewhere. This would mean that the fiscal deficit would be pushed up to Rs 6,19,190 crore (Rs 5,13,590 crore + Rs 1,05,600 crore). If the upstream companies cannot bear 40% of the total loses the government will have to bear a greater proportion of the total losses, pushing the fiscal deficit up further.
Oil subsidies are not the only subsidies going around. The government is expected to overshoot its food subsidy target of Rs75,000 crore as well. The Economic Times had quoted a food ministry official on June 15, 2012, confirming that the food subsidy target will be overshot, after the government had approved the minimum support price (MSP) of rice to be increased by 16 per cent to Rs 1,250 per quintal to. “The under-provisioning of food subsidy in the current year is at Rs 31,750 crore. Now with increased MSP on paddy(i.e. rice), the total food subsidy deficit at the end of the current year will be about Rs 40,000 crore putting immense pressure on the food subsidy burden of the government,” said a food ministry official,” the Economic Times had reported.
If we add this Rs 40,000 crore to Rs 6,19,190 crore the deficit shoots up to Rs 6,59,190 crore. This is something that Acharya confirms in his column. “A few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government’s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget’s target for the full year,” he writes.
What does this mean is that for the first four months of the year, the government’s fiscal deficit was greater than half of the fiscal deficit for the year. The targeted fiscal deficit for the year was Rs 5,13,590crore. Half of it would equal to Rs 2,56,795 crore. The government has already crossed this in the first four months. At the same rate it would end up with a fiscal deficit of Rs 7,70,385 crore (Rs 2,56,795 crore x 3) by the end of the year. This would work out to 50% more than the projected fiscal deficit of Rs 5,13,590 crore.
It would be preposterous on my part to project a fiscal deficit which is 50% more than the projected deficit. But as I had shown a little earlier a deficit of around Rs 6,60,000 crore is pretty much on the cards.
What does not help is the fact that things aren’t looking too good on the revenue side for the government. As Acharya puts it “More recently, there are ominous, if unsurprising, indications of a significant deceleration in direct tax collections up through August, especially from companies, with gross corporate tax revenues stagnant compared to April-August of the previous financial year. Despite finance ministry reassurances, tax collections for the year could fall significantly below Budget targets because of sluggish economic activity.”
So the government is not going to earn as much as it had expected to through taxes. The government also has set a disinvestment target of Rs30,000 crore. It hopes to earn this money by selling shares of public sector companies. But six months into the financial year there has been no activity on this front.
Taking these factors into account a fiscal deficit of Rs 7,00,000 crore can be expected. Fiscal deficit as we all know is expressed as a proportion of the gross domestic product (GDP). The projected fiscal deficit of Rs 5,13,590 crore works out to 5.1% of the GDP. The GDP in this case is assumed to be at Rs 101,59,884 crore.
With a fiscal deficit of Rs 7,00,000 crore, fiscal deficit as a proportion of GDP works out to 6.9% (Rs 7,00,000 crore expressed as a % of Rs 101,59,884 crore).
The GDP number of Rs 101,59,884 crore is also a projection. The assumption is that the GDP will grow by a nominal rate of 14% over the last financial year’s advance estimate of GDP at Rs 89,121,79 crore. The trouble is that the economy is slowing down and it is highly unlikely to grow at a nominal rate of 14%. The current whole sale price inflation is around 7%. The real rate of growth for the first six months of the calendar year (i.e. the period between January 1, 2012 and June 30, 2012) has been around 5.4%. If we add that to the inflation we are talking of a nominal growth of around 12.5%. At that rate the expected GDP for the year is likely to be around Rs 100,26,201crore (1.125 x Rs 89,121,79 crore).
Hence the fiscal deficit as a percentage of GDP will be around 7% (Rs 700,000 crore expressed as a percentage of Rs 100,26,201crore). A 7% fiscal deficit would give the Prime Minister Manmohan Singh a sense of déjà vu. In his speech as the Finance Minister of India in 1991 he had said “The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government…is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s.”
One way out of this mess is to cut the losses due to the sales diesel, kerosene and on LPG. But that would mean a price increase of Rs 12/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG. That of course is not going to happen. Also with the government having to borrow more to meet the increased fiscal deficit, the interest rates will continue to remain high.
India is staring at a huge economic problem. The question is whether the government is ready to recognise it. As Pratap Bhanu Mehta writes in The Indian Express “The central driver of good economics is recognising the problem.” The trouble is that the Congress led UPA government doesn’t want to recognise the problem, let alone tackle it.
(The article originally appeared on www.firstpost.com on September 14,2012. http://www.firstpost.com/economy/why-the-diesel-hike-will-not-even-dent-the-fiscal-deficit-455249.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
petrol
Higher Oil Prices or Higher EMIs? Take your pick
Vivek Kaul
The petrol prices were raised by Rs 6.28 per litre yesterday. With taxes the total comes to Rs 7.54 per litre. Let’s try and understand what impact this increase in prices will have.
The primary beneficiary of this increase will be the oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum. The companies had been losing Rs 6.28 per litre of petrol they sold. Since December, when prices were last raised the companies had lost $830million in total. With the increase in prices the companies will not lose money when they sell petrol.
The increase in price will have no impact on the fiscal deficit of the government. The fiscal deficit is the difference between what the government spends and what it earns. The government does not subsidize the oil marketing companies for the losses they make on selling petrol.
It subsidizes them for losses made on selling diesel, kerosene and LPG, below cost.
The losses on account of this currently run at Rs 512 crore a day. The loss last year to these companies because of selling diesel, kerosene and LPG below cost was at Rs 138,541crore. They were compensated for this loss by the government. Out of this the government got the oil and gas producing companies like ONGC, Oil India Ltd and GAIL to pick up a tab of Rs 55,000 crore. The remaining Rs 83,000 odd crore came from the coffers of the government.
What is interesting that when the budget was presented in March, the oil subsidy bill for the year 2011-2012 (from April 1, 2011 to March 31,2012) was expected to be at around Rs 68,500 crore. The final number was Rs 14,500 crore higher.
The losses for this financial year (from April 1, 2012 to March 31,2012) are expected to be at Rs Rs. 193,880 crore. If the losses are divided between the government and the oil and gas producing companies in the same ratio as last year, then the government will have to compensate the oil marketing companies with around Rs 1,14,000 crore. The remaining money will come from the oil and gas producing companies.
The trouble is in two fronts. It will pull down the earnings of the oil and gas producing companies. But that’s the smaller problem. The bigger problem is it will push up the fiscal deficit. If we look at the assumptions made in the budget for the current financial year, the oil subsidies have been assumed at Rs Rs 43,580 crore. If the government has to compensate the oil marketing companies to the extent of Rs 1,14,000 crore, it means that the fiscal deficit will be pushed up by around Rs 70,000 crore more (Rs 1,14,000crore minus Rs 43,580 crore), assuming all other expenses remain the same.
A higher fiscal deficit would mean that the government would have to borrow more. A higher government borrowing will ‘crowd-out’ the private borrowing and push interest rates higher. This would mean higher equated monthly installments(EMIs) for people who have loans to pay off or are even thinking of borrowing.
The only way of bringing down the interest rates is to bring down the fiscal deficit. The fiscal deficit target for the financial year 2012-2013 has been set at Rs 5,13,590 crore. The government raises this money from the financial system by issuing bonds which pay interest and mature at various points of time. Of this amount that the government will raise, it will spend Rs 3,19,759 crore to pay interest on the debt that it already has. Rs 1,24,302 crore will be spent to payback the debt that was raised in the previous years and matures during the course of the year 2012-2013. Hence a total of Rs 4,44,061 crore or a whopping 86.5% of the fiscal deficit will be spent in paying interest on and paying off previously issued debt. This is an expenditure that cannot be done away with.
The other major expenditure for the government during the course of the year are subsidies. The total cost of subsidies during the course of this year has been estimated to be at Rs Rs 1,90,015 crore. The subsidies are basically of three kinds: oil, food and petroleum. The food subsidy is at Rs 75,000 crore. This is a favourite with Sonia Gandhi and hence cannot be lowered. And more than that there is a humanitarian angle to it as well.
The fertizlier subsidies have been estimated at Rs 60,974 crore. This is a political hot potato and any attempts to cut this in the pst have been unsuccessful and have had to be rolled back. There are other subsidies amounting to Rs 10,461 crore which are minuscule in comparison to the numbers we are talking about.
This leaves us with oil subsidies which have been estimated to be at Rs 43,580 crore. This as we see will be overshot by a huge level, if oil prices continue to be current levels. Even if prices fall a little, the subsidy will not come down by much. .
Hence if the government has to even maintain its deficit (forget bringing it down) the only way out currently is to increase the price of diesel, LPG and kerosene. Diesel is a transport fuel and an increase in its price will push prices inflation in the short term. But maintain the fiscal deficit will at least keep interest rates at their current levels and not push them up from their already high levels.
If the government continues to subsidize diesel, LPG and kerosene, interest rates are bound to go up because it will have to borrow more. This will mean higher EMIs for sure. It would also mean businesses postponing expansion because higher interest rates would mean that projects may not be financially viable. It would also mean people borrowing lesser to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. In turn it would mean lower economic growth.
That’s the choice the government has to make. Does it want the citizens of this country to pay higher fuel and gas prices? Or does it want them to pay higher EMIs? There is no way of providing both.
(The article originally appeared at www.rediff.com on May 24,2012. http://www.rediff.com/business/slide-show/slide-show-1-special-higher-oil-prices-or-higher-emis-take-your-pick/20120524.htm)
(Vivek Kaul is a writer and can be reached at [email protected])