NEW DELHI: A cut in the food and fertilizer subsidy bill in FY25, along with tax revenue buoyancy, is set to help the Centre rein in borrowing, creating room for the private sector to step in with investments.
The Centre’s food, fertilizer and petroleum subsidy is projected to decline by over 7% in FY25 to ₹3.81 trillion, which officials attribute to a fall in global commodity prices. The reduction in subsidy in the next fiscal is not as sharp as the massive 22% moderation seen in FY24, which came on the back of a high base in prices following the Ukraine war.
Experts said that given volatile geopolitical conditions, it remains to be seen exactly how prices behave in FY25.
The budget document showed that the Centre has allocated ₹1.64 trillion as the fertilizer subsidy in FY25, a 13% reduction from the revised estimates for the current financial year. The food subsidy has also been lowered by over 3% to ₹two trillion, while the petroleum subsidy has been cut 2.6% for the next fiscal to ₹11,925 crore.
The fertilizer subsidy has been estimated on recent trends in the global prices of ammonia and fertilizers, which have been on a downward trend for the last six months, finance secretary TV Somanathan explained at a post-budget news briefing.
“Our current estimate is based on the information we have right now.”
Increasing domestic production of fertilizers is also contributing to the expected lower fertilizer subsidy bill. Import of urea, the most commonly used fertilizer in India, is at 4-5 million tonnes this fiscal, lower than the 7.5 mt imported in the previous year. This is due to higher domestic production and increased use of nano-liquid urea, chemicals and fertilizer minister Mansukh Mandaviya had said on 17 January.
The government has taken several steps since 2014 to boost domestic production of fertilizers and reduce imports, including reviving old fertilizer plants to make them viable. The government has also launched a scheme to incentivize states to curb the use of chemical fertilizers. India has also entered into long-term supply agreements with global suppliers for assured imports of fertilizers and its raw materials at pre-determined prices.
To be sure, the government remains committed to meeting the fertilizer subsidy bill even if consumption or global prices go up, in order to make sure plant nutrients are available to farmers at affordable prices and subsidy is available to producers and sellers.
Without that implicit commitment, producers may not be in a position to operate in the market, a government official said on condition of anonymity. Fertilizer subsidy is directly transferred to the producer or importer based on the details of purchase by the farmer at the retail level captured through point of sale machines.
The Centre’s overall subsidy bill has over a period of time fallen in the last decade with the introduction of market linked pricing of petrol and diesel. However, cooking gas still attracts some subsidy under the Ujjwala scheme.
The Centre’s tax revenue is projected to grow at about 12% in FY25 to ₹26 trillion, and non-tax revenue by over 6% to ₹3.9 trillion, aiding fiscal consolidation. “The government’s intention of achieving a fiscal deficit of 4.5% of GDP in FY26 will enhance its credibility in fiscal management and improve global investor confidence in the Indian economy,” said Sunil Kumar Sinha, principal economist, India Ratings.