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Union Budget 2013: Cut in fuel, fertiliser subsidy key to trim Non-Plan expenditure

The Non-Plan expenditure of the government constitutes 65 percent of total government expenditure that was budgeted for fiscal 2012-13. Non-Plan expenditure was estimated at Rs 969,000 crore while total expenditure including plan expenditure was Rs 14,90,000 crore.

The government has overshot its Non-Plan expenditure for 2012-13 by Rs 93,000 crore due to rise in its subsidy bill. Non-Plan expenditure has overshot budget estimates by 10 percent assuming that all other headings of Non-Plan expenditure is on target.

Expensive subsidy. Reuters

Expensive subsidy. Reuters

Non-Plan expenditure of the government of India is dominated by: a) Interest payments and debt servicing b) Defence and c) Subsidies. Table 1 gives the fiscal 2012-13 budget estimates and the overshoots for these three headings, which account for 71.5 percent of Non-Plan expenditure.

tablearjun

The subsidy bill for 2012-13 has increased by 52 percent and this trend cannot be allowed to continue into fiscal 2013-14 as rising Non-Plan expenditure impacts government spending on infrastructure and capacity creating in the economy.

Interest expenses will continue to rise year on year as the government borrows from the markets every year to fund its fiscal deficit. Market borrowings fund over 90 percent of the government's fiscal deficit and the government borrowed Rs 479,000 crore in 2012-13 for funding the deficit. The government will have to pay interest on the Rs 479,000 crore of bonds issued in the coming fiscal leading to higher interest costs. Assuming that the average cost of borrowing was around 8.2 percent, interest outgo for 2013-14 will increase by around Rs 40,000 crore.

Defence and services spending is sticky, as the government cannot compromise on national security. The government is unlikely to reduce its defence spending though it may manage to keep it from rising much higher.

It is now back to subsidies. The fertiliser and petroleum subsidy bill is largely dependent on the movement of global oil prices and oil prices rose by around 20 percent in 2012-13. The government has allowed oil marketing companies to set petrol prices in tune to the rise in oil prices globally. Diesel prices have also been decontrolled though in a phased manner. Oil price outlook in the global markets is soft on the back of rising oil production in the US that saw the country’s trade deficit fall by 21 percent in January 2013 on the back of lower oil imports.

Petrol and diesel price decontrol coupled with stable to soft global oil prices will help the government reduce its oil subsidy bill. The fertiliser subsidy is expected to come down by 15 percent in 2013-14 on the back of falling fertiliser prices globally. Fertiliser prices have come off by 15 percent as of January 2013 on a year-on-year basis.

Food subsidy is likely to increase by 20 percent as the government passes a food security bill in Parliament in February 2013.

Estimate for 2013-14 Non-Plan expenditure

The estimate for total Non-Plan expenditure is based on lower fuel and fertiliser subsidy, higher interest costs and food subsidy and a general rise in other expenses on the back of an inflation rate of 7 percent (Inflation as measured by the WPI is expected at 6.5 percent for March 2013 and is expected to go up to around 7 percent levels on the back of higher fuel prices). Table 2 gives the estimate for Non-Plan expenditure for 2013-14.

tablearjun

Non-Plan expenditure is expected to grow by 4 percent in 2013-14 against a growth rate of 19 percent seen in 2012-13.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors