Another issue to be discussed would be the government’s rising subsidy bill. With increasing subsidies on petroleum, food items and fertilizers, it is estimated that India’s subsidy bill will double by the end of 2012. India spends around 1.25% of GDP on fertilizer and oil subsidies. Earlier in the Budget 2011-12, the government announced a fuel subsidy bill of $5.2 billion for the financial year, based on the hypothesis that oil prices will remain below the $100 per barrel. However, crude oil prices had been hanging over $115 per barrel for most of the year, falling only recently and dipping slightly below the $100 mark. With this the under-recoveries of oil marketing companies for the full fiscal year is expected to exceed Rs 1.3 lakh crore with the government expected to take one third of the burden, thereby further increasing the subsidy bill.
Moreover, with the Food Security Bill standing cleared, the food subsidy bill is expected to rise by Rs 27,663 crore at nearly Rs 95,000 crore, while food grains requirement would go up to 61 million tonnes from 55 million tonnes. The amount is nearly twice the amount the government spent on food subsidies in 2009-10. Clearly, there is no escaping of the fact that the government is under pressure to cover the losses of the under-recoveries, at a time when the government is grappling with a tight cash condition and is almost on the verge of missing the fiscal gap target for the fiscal.
Therefore, the government needs to bring in more sustainable solution to the under-recoveries. Further, with the inter-ministerial committee of the government planning to reduce the subsidy on non urea imports like DAP and MoP for the 2012-13 fiscal, and PMEAC’s suggestion of aligning diesel prices to global market in a phased manner and also raising excise and service taxes to pre-crisis level of 12% will help the government to contain and improve worth of subsidies. Moreover the Budget is likely to open up prices of petro products, which will result in higher prices of diesel and petroleum.