Pranab's budget math has already gone for a toss

The Union budget has not even been passed, and already official whispers are that Pranab Mukherjee has got his subsidy math all wrong.

In food subsidies, he will miss the target by a mile. In fuel subsidies, he will miss it by several miles, unless very huge increases are planned in diesel, kerosene and cooking gas prices.

As for the self-imposed target of restricting the subsidy bill to 2 percent of GDP, Mukherjee is probably going to have to eat his words before long.

According to a report in The Economic Times , a Planning Commission group has said that the food subsidy outlays earmarked in the budget (Rs 75,000 crore) are grossly inadequate by at least a third, especially if the Food Security Bill is to be passed for implementation this year.

Nobody has, of course, too much faith in any budget number these days, but the food subsidy provision of Rs 75,000 crore was looking suspicious from Day One since it was below last year’s actual spend of Rs 80,000 crore.

The Planning Commission’s panel estimates the food subsidy bill at Rs 1,00,000 crore in 2012-13, and has pointed out that by pegging the outlay unrealistically low, the finance ministry is setting itself up for a bigger bill later since the Food Corporation will end up having to borrow more to procure the grain needed for the Food Bill (more borrowing means more interest costs).

The newspaper quotes an unnamed senior official of the Planning Commission as saying: “When the Food Security Bill is implemented, the subsidy levels will rise to more than Rs 1 lakh crore. If the figures are under-budgeted, then interest payouts on such a huge sum will be devastating for the fisc.”

However, even the Rs 1,00,000 crore could be an underestimate, since the government could be announcing huge increases in food procurement prices shortly.

As reported by Firstpost around mid-April, the Commission on Agricultural Costs and Prices (CACP), the apex recommendatory body for setting minimum support prices (MSPs) for kharif and rabi crops, has called for 16-40 percent increases in the coming agricultural season. The hikes suggested include 16 percent for paddy, 40 percent for jowar and bajra (the poor man’s cereal), 25 percent for cotton, 30 percent for soyabean, and 25 percent for pulses like urad and moong.

With elections looming in 2014, there is little doubt that the government will push through most of these increases.

The interesting thing about the bad budget math on food subsidies is that this cost is largely incurred in the first half of the year, when the bulk of the food procurement takes place. This means, Mukherjee will be caught out fairly early this year for poor arithmetic skills.

But in the remaining part of the year, he is sure to miss the budget targets on fuel subsidies , for which he has provided a meagre Rs 43,600 crore, including Rs 25,000 crore of dues owed for 2011-12 to our oil marketing companies (OMCs).

That leaves just around Rs 18,600 crore for subsidy payments in 2012-13, and oil prices have shown no signs of easing. According to the Petroleum Planning and Analysis Cell (PPAC), the OMCs are losing Rs 562 crore daily on account of under-recoveries on diesel, kerosene and cooking gas - which are underpriced to the tune of Rs 14.29 per litre, Rs 31.04 per litre, and Rs 570.50 per cylinder respectively.

A loss of Rs 562 crore a day means over Rs 200,000 crore of under-recoveries in 2012-13, unless prices are going to be raised steeply. But even after bidding goodbye to the Uttar Pradesh elections, there is no sign of the government moving on price increases. The more the price hikes are postponed, the sharper they will have to be to keep subsidies within targets.

Unless, of course, Pranab Mukherjee has no intention of keeping his promise.

Mukherjee promised to restrict subsidies to 2 percent of GDP this year. He said in his budget speech: “It would be my endeavour to restrict the expenditure on Central subsidies to under 2 percent of GDP in 2012-13. Over the next three years, it would be further brought down to 1.75 percent of GDP.”

Two percent of GDP is roughly over Rs 2,00,000 crore - and petroleum alone is going to force him to review that target. Food subsidy will make things worse, and fertiliser could compound it.

Mr Mukherjee, this is going to another year of poor math for your ministry.