Explicit Subsidies

Introduction

Only a part of the Central Government subsidies is clearly visible in the Government’s budget document. Such explicit subsidies, mainly on food, fertilizer and petroleum, account for about 38 per cent of total Government subsidies, including those ‘hidden’ in the provision of social and economic services.

Food Subsidies

Food subsidies in India comprises subsidies to farmers through support prices and purchase operations of the Food Corporation of India (FCI), consumer subsidies through the public distribution system (PDS), and subsidies to FCI to cover all its costs. Food subsidies are mainly on account of paddy and wheat. e rapid increase in food subsidy in recent years is attributable to what is called the ‘economic costs’ of food grains, which include the minimum support prices paid to farmers in the procurement process.

Fertilizer Subsidies

In order to control the fluctuations in fertilizer prices, the Government of India regulates the fertilizer market through the RPS. The RPS was first introduced for nitrogenous fertilizers in November 1977, and extended to complex fertilizers in February 1979. The RPS is essentially a cost-plus approach with some norms for capacity utilization and conversion cost. The plant specific retention prices (RP) are revised every quarter so that price increases in plant inputs can be taken into account. The retail price of fertilizers is fled and is uniform throughout the country. The difference between the retention price (adjusted for freight and dealer’s margin) and the price at which the fertilizers are provided to the farmer is paid back to the manufacturer as subsidy. Transportation costs are also compensated on the basis of equated freight computed on a normative basis.

It was only in the aftermath of the economic crisis of 1991 that a serious attempt was made to reform RPS to rationalize the fertilizer subsidies. Government decontrolled the import of complex fertilizers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992, and extended at-rate concession on these fertilizers. But, urea imports continue to be restricted and canalized. Thus, at-rate concessions are provided on imported and indigenous fertilizers, while urea is subsidized under the RPS. Government constituted high-powered committee to review the existing RPS and suggest a new pricing policy for urea under the chairmanship of C. H. Hanumantha Rao in January 1997. The committee recommended a Normative Referral Price (NRP) system in place of the RPS. In 2000, the Expenditure Reforms Commission (ERC), in its report, suggested phasing out of the unit wise RPS in stages over a period of six years and its replacement with the group-concession scheme.

The new urea pricing policy for the industry suggested by the ERC came into effect from April 1, 2003. e new scheme is to be implemented in three stages: the first from April 1, 2003 to March 31, 2004; the second from April 1, 2004 to March 31, 2006. The Government has approved the New Pricing Scheme (NPS) Stage-III for urea units in the country with effect from

1 October, 2006 to 31 March, 2010. NPS Stage-III has been formulated keeping in view the recommendations of the Working Group on Urea Policy set up under the chairmanship of Dr. Y.K. Alagh. The policy for NPS Stage-III aims at greater efficiency in urea production and its distribution in the country.

Petroleum Subsidies

Retail selling prices of motor spirit and high speed diesel for the consumers are calculated by taking into account: (i) Basic price at refinery level on import parity basis, (ii) Freight up to depots, (iii) Marketing cost and margin, (iv) State-specific irrecoverable levies, (v) Excise duty, (vi) Delivery charges from depot to retail pump outlet, (vii) Sales tax and other local levies, and (viii) Dealers’ commission.

The basic selling prices of motor spirit and high speed diesel are uniform at all refinery locations throughout the country. As per the existing arrangement between the oil marketing companies and refineries, the element at (i) is revised on a fortnightly basis in line with movements in international prices. The marketing costs and margins, dealers’ commission, and delivery charges within free delivery zones are also uniform. The prices at various locations vary depending upon the distance from the refinery, rate of sales tax and other local levies.

Although the oil marketing companies were granted freedom to x retail selling prices of motor spirit and high speed diesel on a fortnightly basis, in practice, this arrangement has not appeared to have worked in quite a transparent manner. For example, there was no revision of motor spirit and high speed diesel prices between January 1, 2004 and June 16, 2004, while the prices of crude and petroleum products in international markets increased rapidly.

In order to mitigate the hardship of oil companies, Government worked out a new methodology with effect from August 1, 2004 allowing the oil marketing companies limited freedom to revise the prices of motor spirit and high speed diesel within a price band. Oil companies are permitted to adjust prices on their own within a band of ’10 per cent of the mean of rolling average import-parity price including cost of freight of the previous 12 months and last quarter. When prices move beyond this band, the oil marketing companies have to approach the government to modulate the excise duty rates.

Major Centrally Sponsored Poverty Alleviation Schemes

Quantifying the subsidy amount incurred on schemes for the poor, like small and marginal farmers, landless labour and the urban poor is an integral part of expenditure management and restructuring. Apart from food, fertilizer and petroleum subsidy, which are directly incurred and administered by the Central Government, there are a myriad other poverty alleviation schemes funded by the Centre but administered through lower level governments. These are Centrally Sponsored Schemes (CSS). Some of the CSS are somewhere between a pure transfer and a more complex subsidy. They are not necessarily commodity-specific, but involve subsidized loans to vulnerable sections for specific purposes or projects benefiting the poor. Out of over 200 CSS, six are in the domain of Rural Development (RD) with the principal objective of poverty alleviation and employment generation. In terms of financial outlays, these six schemes account for Rs. 11,322 crore in the 2004-05 Budget, equivalent to almost a third of the total outlay of Rs. 36,000 crore on CSS. Four major programmes, namely Sampoorna Grameen Rozgar Yojana (SGRY), Swaranjayanti Gram Swarozgar Yojana (SGSY), Pradhan Mantri Gram Sadak Yojana (PMGSY) and Rural Housing Scheme (RHS) account for 98 per cent of the budgetary allocation on the six CSS of the Ministry of Rural Development in the current financial year.