Govt unlikely to get into a twist over budget propriety by replacing fertiliser subsidy with cash transfers

There is speculation that departing from the convention the government will announce a big-bang vote-catching giveaway in its election-eve budget on 1 February.

Governments have so far restrained themselves in pre-election budgets believing it is the prerogative of the next government to announce fresh taxes, reliefs and expenditure.

“Constitutional propriety requires that new government formulates the tax and expenditure policies for 2009-10,” Pranab Mukherjee said in his interim budget speech of February 2009 as finance minister. Such policies must aim at sustaining an annual economic growth of 9 percent for many years, creating 12 million jobs per year, reducing the share of poverty in 2014 to half of the 2009 level and aim at an annual agricultural growth rate of 4 percent, he said. But Mukherjee did not try to win the voters over with sops.

Representational image. Reuters

Representational image. Reuters

In his interim budget speech of 3 February, 2004, the then finance minister Jaswant Singh also did not depart from convention. He sought Parliament’s approval for incurring essential expenditure for the first four months of 2004-05 while extending the existing tax structure to the next year.

Former finance minister P Chidambaram too did not make changes to tax law in his February 2014 interim budget ‘in keeping with the conventions.”  But he had tried to win over farmers by announcing a loan waiver in the previous year’s budget, which ultimately cost the government Rs 52,275 crore.

In the interim budget, he reduced excise duties on capital goods, consumer non-durables, cars and cell phones. However, changes in indirect taxes, that is, excise and customs duties do not need Parliament’s approval. He also provided Rs 500 cr in the budget so that all retired soldiers of the same rank got the same pension.

But finance minister Arun Jaitley has told a TV news channel that “the larger interest of the nation dictates what will be part of the interim budget.” Some papers have reported that the government intends to transfer Rs 70,000 crore directly to farmers in place of urea subsidy.

If that is the case the government would be abiding by convention and not incurring additional fresh expenditure. This year’s budgeted fertiliser subsidy is Rs 70,079 crore. So there will be a change in the form of expenditure, but not of substance.

Giving cash instead of subsidised fertilisers is a fraught exercise. First is the issue of identifying the beneficiaries when land records are not properly maintained. Since tenancies are informal, tenant farmers will be excluded from direct cash transfers. So the government might end up antagonising one section of farmers while pleasing another. Fertiliser use varies according to crops.

The amount that is applied to wheat and paddy is not the same as the requirement of potato or pulses. Even within a crop like rice, fertiliser-responsive varieties grown in say, irrigated Punjab will need higher doses of fertiliser than those grown in the rainfed areas of Orissa. So the subsidy or cash transfer cannot be uniform.


India imports much of its fertilisers. Their market prices fluctuate, so the subsidy will have to vary if farmers are to be protected. And the government will have to be diligent in making payments well before the sowing season to enable farmers to pay for fertiliser.

For these reasons, former agriculture secretary Siraj Hussain believes the government will not make changes in the subsidy regime and news reports of the government replacing fertiliser subsidy with cash transfers are speculative and ill-informed.

A comparison has been made to Pahal as the scheme for payment of cooking gas subsidy in cash is called. Cash transfers in lieu of subsidised cooking gas work because the entitlement of a household is capped at 12 cylinders per year. Both the subsidy amount and the market price of cooking gas are also fixed by the government.

Faced with the erosion of its popularity the government can yet defy propriety and throw money at voters. Its record in office shows it is not a stickler for niceties. In March 2016, it passed the Aadhar (Targeted Delivery of Subsidies, Benefits and Other Services) Act as a money bill to get over its lack of majority in the Rajya Sabha.

The government is also likely to present a prettified picture of its compliance with revenue and fiscal deficit targets. The Comptroller and Auditor General (CAG) has criticised it for resorting to off-budget financing to cover arrears of fertiliser subsidy in 2016-17 through special banking arrangements and borrowing from NABARD to meet the expenditure of the Accelerated Irrigation Benefit Programme.

But Jaitley will be in the company of other finance ministers who have resorted to such practices. Chidambaram issued oil bonds to park fuel subsidies outside the budget. He also underprovided for fertiliser and food subsidies.

When Pranab Mukherjee was finance minister, the state-owned Life Insurance Corporation bailed out the government by buying shares of Oil and Natural Gas Commission at a loss so it could meet the disinvestment target.

In 1998-99, the Cabinet Committee on Disinvestment headed by late Prime Minister Atal Behari Vajpayee allowed Mahanagar Telephone Nigam Limited and Videsh Sanchar Nigam Limited to buy back their shares from the government; Gas Authority of India and Indian Oil Corporation were also permitted to pick up minority stakes in Oil and National Gas Commission (ONGC).

If a government does not wish to be self-disciplined, conventions cannot restrain it.

(The author is a senior consultant to ICRIER and blogs on He tweets @smartindianagri)

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Updated Date: Jan 24, 2019 17:30:05 IST

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