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Kelkar panel for scrapping all subsidy; says no action will push FY13 fiscal deficit to 6.1%
-NDTV

The Kelkar committee has said subsidies pose the greatest risk to the country's fiscal situation, while suggesting that the excise and service tax rates should be cut to 8% over the next few years.

The panel calls for the need to step up disinvestment drive in state-run firms for fiscal consolidation.

It says diesel should be deregulated by 2014 and all subsidy on cooking gas be cut by 2015.

All subsidies must be withdrawn in a phased manner to balance economic growth and the need to protect disadvantaged sections of the society, the report says.

The government panel’s report, made public on Friday, says half the subsidy on diesel should be eliminated in this fiscal and the remaining half by the next.

It also recommends that subsidy on cooking gas or LPG be eliminated by fiscal year 2015, by which time, it says, kerosene subsidy should also be cut to one third of what it is currently.

The panel has also suggested a phased rollout of a food subsidy plan and "urgent reform" in urea pricing.

The committee, which had submitted its report to Finance Minister P Chidambaram on September 3, in its report recommended an immediate hike of Rs. 4 in the price of diesel, of kerosene by Rs. 2 a litre and of LPG by Rs. 50 a cylinder. Ten days later, on September 13, the Manmohan Singh government bit the subsidy bullet, announcing a diesel price hike of Rs. 5. It did not raise cooking gas or kerosene prices, but restricted supply of subsidized LPG cylinders to six a year per family.

The committee has warned in its report that if nothing is done on the subsidy front, the country’s fiscal deficit could hit 6.1 per cent in this financial year, resulting in a shortfall in tax revenues of Rs. 60,000 crore. Budgeted expenditure on subsidies would be higher by or at Rs. 70000 crore and current account deficit would be at 4.3% of the GDP, it says.  
 
The Kelkar Committee was tasked with recommending mid-term corrections in this fiscal year and to draw a framework on the basis of that correction for the rest of the term of the 13th Finance Commission (2010-2015), which is headed by Vijay Kelkar.

"The Indian economy is presently poised on the edge of a fiscal precipice, making corrective measures aimed at speedy fiscal consolidation an imperative necessity if serious adverse consequences stemming from this situation are to be averted in an efficient and timely manner," the report said.

The report was released on the same day as at least one of the key pressure points on the Indian economy eased after data showed the current account deficit shrank from an all-time high in the April-June quarter.

The data helped turn India's balance of payments to surplus after a worrying slide towards dangerous territory, but a big reason for the improvement on the external front was falling imports due to the domestic economy's weakness.

India's economy slowed to 5.5 percent growth in the April-June quarter, the lowest level in nearly three years and far below the country's expectations of near double digit growth.

Markets expect the government to overshoot its fiscal deficit target for the financial year ending March 2013 - seeing it at 5.8 percent of GDP from a budgeted 5.1 percent. The fiscal deficit in April-August rose to 65.7 percent of the full-year target, government data showed on Friday.

The panel, whose recommendations are not binding, warned that failing to curb subsidies would see a flight of foreign capital and a potential credit rating downgrade.

But, slashing subsidies is a political minefield in a country with hundreds of millions of poor. The government has won back-to-back elections on higher social welfare spending.

"The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable," Arvind Mayaram, a senior finance ministry official, said in a statement after the report was released.