Fiscal deficit and a prayer to God

India is a country that lives on hope, gods and pipe-dreams. Prime Minister Manmohan Singh is no different. In a recent interview after taking charge as the finance minister of the country he said he would focus on controlling the fiscal deficit through a series of measures that the officials were working on. He did not explain what these measures were. But as things stand, it is next to impossible for the government to control the fiscal deficit and the Prime Minister can only hope for the best.
Fiscal deficit is the difference between what the government earns and spends. For the financial year 2012-2013 (from April 1, 2012, to March 31, 2013) this number is expected to be at `5,13,590 crore. The government finances the deficit by borrowing money or taking on debt, as it is technically referred to.
There are several reasons why India’s fiscal deficit is likely to turn out to be higher than the projected number. Let’s start with oil subsidies. Oil subsidies for the year have been budgeted at `43,580 crore. The government has more or less run out of this money. It has paid `38,500 crore to oil marketing companies (OMCs), like the Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, 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 `5,080 crore with the government for compensating the OMCs for the losses for the remaining part of the year.
International oil prices have come down since the beginning of April. Back then the OMCs were losing around `563 crore per day. An estimate made at the beginning of July by ICICI Securities puts this loss at `355 crore a day. Oil prices have fallen further by around eight per cent since this estimate was made. Adjusting for that the oil companies continue to lose around `325 crore per day, or around `10,000 crore per month. Hence, the `5,080 crore that the government has remaining in its oil subsidy account would be used up in 15 days, at the current rate of losses.
Oil prices have fallen by 32 per cent to $85 per barrel since the beginning of April. It is unlikely that the price will continue to fall given that at some stage the oil cartel, Organisation of Petroleum Exporting Countries (Opec), will intervene and start cutting production to push up prices. Also, the threat of confrontation between Iran and the United States has been on for a while. Even a whiff of a crisis can push up oil prices. Iran is the second largest producer of oil in Opec after Saudi Arabia. It has been trying to sell oil in currencies other than the US dollar for the past few years, much to the annoyance of the US.
So if the OMCs continue to lose money at the current rate, their projected losses for the year will be over `120,000 crore. In 2011-2012, the government compensated around 60 per cent of the losses. It got oil producing companies like the ONGC and the Oil India to pay the OMCs for the remaining losses. If the same ratio is followed in this financial year as well, it would mean an extra burden of around `72,000 crore for the government (60 per cent of `1,20,000 crore). The fiscal deficit would go up by a similar amount.

Oil subsidies are not the government’s only problem. On June 14, 2012, the government had approved the minimum support price (MSP) of rice to be increased by 16 per cent from `1,250 per quintal to `1,080 per quintal. The Food Corporation of India buys rice from the farmers at the MSP. The food subsidy for the current financial year has been set at `75,000 crore. Experts believe that this number is terribly under-provisioned given the various programmes of the government. Also, with a significant increase in the MSP of rice the food subsidy is expected to cost the government around `40,000 crore more than its current estimates. Even this number is likely to be beaten because after increasing the MSP of rice significantly, a similar price increase would have to be made for wheat during the coming months.
What does not help is that interest payments on all the money that the government has borrowed comes to `3,19,759 crore for this financial year. Other than paying interest the government also needs to repay the past debt that is maturing. This amount comes to `1,24,302 crore. Hence, the cost of total debt servicing comes to `4,44,061 crore, or around 87 per cent of the projected fiscal deficit of `5,13,590 crore for the year. There is nothing that Dr Singh and the government can do to control this.
If all these problems were not enough the monsoon till now has been 23 per cent deficient. This impacts the purchasing power of rural India and means lower sales of cars, bikes, white goods and fast moving consumer products, leading to a lower collection of indirect tax for the government. Lower taxes can drive up the fiscal deficit further.
So what is the way out? The subsidy on various oil products needs to be brought down. That’s the only solution that the Manmohan Singh-led government has to this problem. But the question is will they bite the bullet and take some tough decisions? From their past record it can be safely assumed that they won’t. That’s why controlling the fiscal deficit remains a pipe-dream.
It’s time for Prime Minister Manmohan Singh to do what most Indians do when they are stretched and stressed. Pray to God, and hope for the best.

The writer is based in Mumbai. He can be contacted at vivek.kaul@gmail.com

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