Monday, April 30, 2012

Has the budget already gone for a toss?

As reported by a leading daily, there are already whispers in the official circuit that the Finance Minister (FM) has got his subsidy math wrong. The FM had stated categorically during his budget speech that he was looking at restricting this year's subsidy bill to 2% of GDP. If we break down the values, the Budget has allocated Rs 750 bn towards food subsidy. But as per the Planning Commission, food subsidy would eat up at least Rs 1,000 bn if the Food Security Bill has to become a reality. And even this amount is an underestimate.

So the FM has two choices. One is to stick to his initial Budget target. If he does this, then he would need to raise the prices of things like diesel, kerosene and LPG gas to meet the needs of food subsidies. If he doesn't raise the prices of these goods then the food subsidy payout would fall short. If this happens, the Food Corporation will have to borrow more money from the government to buy food grains. This in turn would add to the fiscal burden in the form of higher interest costs.

Option two is to raise the subsidies. This again would throw the fiscal balance way off the target. Either ways the government looks set to miss the fiscal targets that it has set for itself in the Budget. The point is why come up with such targets and revise them throughout the year? It seems to have become a regular feature with the government. If one looks at the amount paid out as food subsidy last year, it was a good Rs 800 bn. The target was set at a level even below the actual payout. In light of higher food prices and fuel prices it was but natural that the FM was going to miss his targets. So why set them so low? The answer is simple. It makes the government look good. Albeit temporarily.

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