New Delhi, Sep 28: A committee, formed to prepare a fiscal consolidation plan for the government, Friday recommended withdrawal of all subsidies, saying the Indian economy is poised on the edge of a “fiscal precipice”.
But officials in the finance ministry said the committee’s suggestion cannot be accepted in toto as some subsidies are necessary, given the government’s stated policy of inclusive growth.
The committee, headed by former finance secretary Vijay Kelkar, said half of diesel subsidy should be eliminated by March 2013 and the rest by fiscal 2014.
It recommended kerosene price should be raised by Rs.2 per litre and that the subsidy on the fuel needed to be reduced by one-third by fiscal 2015.
It also suggested phased elimination of subsidy on LPG in the next four years.
In case of food, the panel favoured raising of issue price of foodgrain at ration shops.
On fertiliser subsidies, it wanted the government to raise the urea price.
The report advised the government to sell residual stake in BALCO.
The committee warned the government that in the absence of these corrective measures, the fiscal deficit of the government could shoot up to 6.1 per cent of the gross domestic product (GDP) in the current financial year against the budget estimate of 5.1 per cent.
“We cannot overemphasise the need and the urgency of fiscal consolidation,” said the committee.
“High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus, increase the risk of external sector imbalances and dampen private investment, growth and employment,” said the committee set up by Finance Minister P. Chidambaram to suggest a roadmap for fiscal consolidation.
Elaborating on the reasons behind its suggestions, the committee said: “The external payment situation is flashing red lights. The global economy is likely to be more turbulent, making financing of the large external payment deficits very challenging. Potentially, if no action is taken, we are likely to be in a worse situation than in 1991 for several reasons.”
“Energy prices are at much more elevated levels while our import dependence is now even greater. The Indian economy now is much more open and global developments have greater impact than before.”
India’s “demographic bulge” demands higher growth to meet the rising aspirations of our young generation. “In order words, our economy may be encountering a perfect storm,” it said.
“There is yet another strategic consideration for us now. It is imperative that as a responsible nuclear power, India pursues a responsible fiscal policy. This will enable us to retain our strategic autonomy.”
Arvind Mayaram, secretary in the department of economic affairs, said some recommendations appeared contrary to the declared objective of the government. For example, the government has said it intends to implement the promise of food security for all.
He said the government wanted an informed debate on the report and that was why the report had been uploaded on the finance ministry website.
Economists and independent analysts said the government had already taken to the path of fiscal correction by raising the fuel prices and limiting cooking gas consumption. However, in a developing country where a large portion of the population is poor, subsidies have to be there to protect the vulnerable sections.
The ministry said the report is under consideration and it has not taken a view on it or any of the suggestions.