Govt disagrees with Kelkar panel's subsidy cut proposal

Nearly a month after suggestions by the panel to set guidelines on finances for stringent fiscal consolidation, the government Friday disagreed with the subsidy withdrawal part of the recommendations and invited stakeholders comments on the entire report.
 
Analysts said the government cannot take the unpopular decision while it still faces the widespread disapproval on diesel price hike and reduction in LPG subsidy.

Some of the suggestions given by the panel appeared contrary to the declared objective of the government of sustained and inclusive growth, Economic Affairs Secretary Arvind Mayaram said.

He said the panel's recommendations to withdraw certain subsidies do not agree with the stated policy of the government.

Headed by former finance secretary Vijay Kelkar, the committee was set up by Finance Minister P Chidambaram in August to give a roadmap on India’s financial consolidation plans. The committee submitted its report to the government on September 3.

 The committee, among other things, has recommended an immediate increase in petroleum prices and deregulation of diesel prices by 2014-15, regular revisions in kerosene and LPG and fertilizer prices, strongly warning that a do-nothing approach will likely result in a fiscal deficit of 6.1 per cent in 2012-13.

More importantly, it has warned that lack of action on these fronts would result in a situation likely to be worse than 1991.

While the report is still under consideration of the government, the major suggestion on subsidy removal has not found favour, with Mayaram articulating the government’s view that certain subsidies are inevitable in a developing country with large population.

In the current fiscal year ending March 2013, the government’s subsidy bill is expected to touch Rs 2.4 lakh crore against the budget estimate of Rs 1.9 lakh crore.

The government hopes to cut down oil subsidy payout by Rs 20,000 crore after the recent increase in diesel prices and capping of subsidised cooking gas cylinders.

The panel has expressed concern over the health of Oil Marketing Companies and said if the OMCs are not adequately funded against their under recoveries, there will be a genuine risk of them turning quite like the state electricity boards, which suffer from high debts.

“The high debt of the OMCs could lead them into financial crisis. This in turn, could not only cause an oil supply breakdown resulting in immense public hardship but also adversely impact the banking system from where such debt is sourced,” the report said.

It said hard fiscal consolidation measures are the only way out, given the faltering economic growth, inflation seemingly embedded and external payment situation in red.

The committee was of the view that if growth slipped to around six per cent or below, and employment growth slowed below 2.4 per cent, it will create more problems for the youth looking for jobs.