MARCH 06, 2011

By TIOL Budget Team

THE Union Budget has built-in potential for fresh wave of price increases. A case in point is the inadequate allocation for fertilizer and fuel subsidies.
Lower allocation would necessitate increase in the prices of these products, which, in turn, would necessitate increase in crop support prices as well as general increase in prices of other products and services.

The petroleum subsidy ( for subsidization of domestic LPG & kerosene and transport of such products to far-flung areas) has been slashed by 38.41% to Rs 23640 crore in 2011-12 from the revised estimate of Rs 38386 crore for the current year.

This whittle-down has happened amidst soaring price of imported crude, clearly suggesting that the subsidy allocation is woefully inadequate. The Finance Ministry has three options in emerging scenario: 1) increase allocation later in the year through supplementary demand for grants, 2) enhance the subsidy burden on oil companies 3) increase the highly subsidized prices of LPG, kerosene and diesel 4) exercise a combination of these options.

The underlying message is that the adverse impact of global crude price spiral on Government finances and the domestic inflation cannot be resisted beyond a level.

As for fertilizers, the Finance Ministry has slashed the total fertilizer subsidy allocation for 2011-12 by 9% to Rs 49997.87 crore from the revised budget estimate of Rs 54976.68 crore in 2010-11. The total allocation is split among three heads – imported fertilizers, domestic manufacture of urea and decontrolled fertilizers.

The provision for 2011-12 is inadequate for all three heads, if rise in price of gas and naphtha, fuel oil, imported intermediates such as ammonia and phosphoric acid and imported raw materials such as sulphur is any indication.

An increase in the statutory retail price of urea and varying revisions in the prices of decontrolled subsidized fertilizers appears unavoidable due to reduction in allocation for fertilizer subsidy in the 2011-12 budget and hardening prices of imported fertilizers and raw materials.

Even as domestic urea manufacturers are worried over the absorption of rising costs and delay in revision of administered price mechanism, the 2011-12 budget has reduced subsidy provision for them to Rs 13308 crore from revised estimate of Rs 15080.73 crore in 2010-11.

If the Government decides not to increase the statutory urea price, then it has to either increase the allocation down the year through supplementary demand for grant as it normally does or decontrol urea price by bringing this fertilizer under nutrient-based subsidy (NBS) scheme.
Under NBS, the Government fixes the subsidy per Kg of primary or secondary nutrient (nitrogen in the case of urea) present in fertilizer. It also fixes the concession (subsidy) per tonne of domestic and imported fertilizer for each product. It, however, leaves it to the manufacturers and importers to fix the retail prices of fertilizers within these subsidy rates.

All major fertilizers except urea are under NBS regime at present.

In November 2010, the Government had notified in advance its decision to slash both Per Kg nutrient subsidy as well as per tonne product subsidy for new fiscal beginning 1 April 2011.

The reduction in subsidy allocation for decontrolled fertilizers to Rs 29706.87 crore from revised provision of Rs 33500 crore has to be viewed in this context.

With hardening prices of fertilizers, intermediates and raw materials in international market, the manufacturers and importers of decontrolled fertilizers have no option but to hike the prices at the start of 2011-12.

As for food, the subsidy on this count appears inadequate against the backdrop of growing demand for improvement in food security and the usual yearly increase in food grain procurement prices. The budget has made a provision of Rs 60572.98 crore, which is marginally lower than the revised estimate of Rs 60599.53 crore for 2010-11.

If the Government decides to increase subsidy provisions later in the year, it runs the risk of losing reign on fiscal deficit. This, in turn, would increase the inflationary pressure on the economy.

If the Government opts for increase in prices of fertilizers, petro-fuels and food grain, then it runs the risk of market-led inflation. It is thus going to be a tight rope walk for the Government between fiscal deficit-induced inflation and market-induced inflation in 2011-12.