Direct transfers to slash subsidies by up to 60%: FM

Written by fe Bureau | New Delhi | Updated: Jan 31 2013, 09:37am hrs
Finance minister P Chidambaram has said he is hopeful of achieving 20-60% savings on subsidies a year through better distribution under the new direct benefit transfer (DBT) scheme that he expects to roll out completely by end-2013. The minister also said the Budget in February would be a responsible one, and not one mindful of next years election, according to a Standard Chartered Bank note that highlighted key takeaways from his interaction at an investors conference in London on Tuesday.

With the promise that the subsidy on diesel, which accounts for 60% of the total fuel subsidy bill, will be phased out in two years, the targeted savings on account of DBT in other subsidies would indeed come handy for the Centre in its difficult-looking fiscal consolidation plan.

From the start of this month, the Aadhaar-enabled DBT has been under implementation in 20 districts of the country for disbursal of various doles/entitlements like old-age and widow pension schemes, student scholarships and payments under the employment guarantee scheme.

Subsidies including the three explicit ones on food, fertiliser and fuel will also be distributed to the beneficiaries through this route in coming months. Subsidies this fiscal are budgeted to be R1.9 lakh crore or 12.75% of the Budget, whereas the claims, inclusive of carryovers from last year, would be much higher, Chidambaram said.

Building on the expected 5.3% fiscal deficit for FY13, a 4.8% deficit target is possible in FY14 if the government commits to diesel price deregulation, higher revenues via better tax administration, fertiliser subsidy reduction by way of urea price deregulation and lower administrative costs related to certain expenditure, the note said.

Chidambaram said there was no ground for a rating downgrade for the Indian economy, and that GDP growth will return to 8% level in 2014-15. He expressed confidence that the pending Bills on the pension and insurance sectors would be passed in the budget session of Parliament in February.

The note quoted Chidambaram promising implementation of the goods and services tax (GST) by the end of 2013 and the Direct Taxes Code by August 2013. While reduction of fiscal deficit is an overriding objective for the government, attracting domestic and foreign investment was another priority for the government.

Reviving the investment cycle was key to a gradual recovery in growth to 6-7% in 2013-14 and to 8% in 2014-15.

The finance minister said the GST implementation alone could potentially add 1.5 percentage points to GDP growth, as per the note. Chidambaram said the government was seriously considering suggestions of the Rangarajan committee to review gas prices after 2014. But he hinted that the short-term capital gains tax (STCG) on listed securities is unlikely to be removed, as the government was unable to narrow the tax base. A panel led by Parthasarathi Shome, which reviewed the General Anti-Avoidance Rules, recommended abolition of STCG on listed securities.

The minister, said the note, believed Indias potential growth is 8% and above, and that the country cannot afford to have less than 7% growth.

On issuing sovereign bonds abroad, Chidambaram said the finance ministry is considering different options and has not yet chosen any particular route. He stressed on pursuing fiscal consolidation, with the fiscal deficit being reduced to 4.8% of GDP in 2013-14.

I have drawn the red lines. The red lines are that the fiscal deficit for the current year will be no more than 5.3% (of the GDP) and the fiscal deficit for the next year will be no more than 4.8%. Thats a red line and I will not breach that red line, he said in an interview to Financial Times.

Asked whether the government would be strong enough to cut fuel subsidies, he said he would not make any declarations from the pulpit. The government has already corrected diesel prices and allowed oil companies to make small corrections periodically over a period of time.

Maintaining that the government has to still correct about Rs 10 a litre on diesel, Chidambaram said a beginning has been made this month and the government should be judged by the steps it took.

Asked whether the government would like to abandon fuel subsidies as a long-term goal, he said not all subsidies can be abandoned. Citing the example of kerosene, Chidambaram said if the subsidy on it is removed completely, it would make the fuel unaffordable to the rural poor and they would demand wood for cooking purpose that could lead to destruction of forest.