Narendra Modi govt may clamp down on subsidies

Jun 15 2014, 10:24 IST
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The most obvious measures that could be instrumental in bringing about 'financial discipline' include the crackdown on subsidy, both on the fuel and the farm side. Reuters The most obvious measures that could be instrumental in bringing about 'financial discipline' include the crackdown on subsidy, both on the fuel and the farm side. Reuters
SummaryTough decisions ahead of his govt’s first Budget, Narendra Modi hints at pushing through unpopular reforms.

Prime Minister Narendra Modi’s reference to “tough decisions” by his government to fix the country’s macroeconomic situation offer a clear pointer to decisive action by the Centre in pushing through some of the unpopular reform measures that have been hanging fire, including a clampdown on subsidies and freeing up the labour markets.

At a time when the sustained rally in the stock and bond markets, along with an uptick in factory output and export data in recent months, have rekindled hopes of a rebound in the economy, the Prime Minister’s statement in Goa, where he refers to the proposed steps denting “the immense love that the country has given” to him, suggest that the government may be ready to bite the bullet on some of the controversial reform proposals.

The most obvious measures that could be instrumental in bringing about “financial discipline” include the crackdown on subsidy, both on the fuel and the farm side. This could also take into account that fact that a less-than-normal monsoon could precipitate a surge in inflation that could further dent growth, with the result that any credible inflation-fighting effort will ensure that policy rates claw back into double digits.

Reducing high support prices for wheat and rice in real terms over time to a level that results in lower production of cereals would go a long way in tackling high food stocks, faulty crop mix, and wasteful water usage.

A move towards eliminating all remaining restrictions on movements of agricultural goods, especially fruit and vegetables, across states could have a tempering effect on food inflation, something that would be resisted by the powerful agri traders’ lobby in both the BJP-ruled states and those ruled by allies such as Punjab and Seemandhra.

On the fuel side, a decision on raising prices to cut a $24 billion subsidy bill and shrink the budget deficit. While petrol prices have been freed, the price control on diesel and cooking fuels caps earnings of state-run refiners.

There are also indications that the government may move ahead on easing restrictive provisions of the new Land Acquisition Act, which, while making it easier for infrastructure and affordable housing projects to acquire land, could evoke criticism. During their meeting with finance minister Arun Jaitley earlier last week, several state finance ministers raised the issue of the Act being a stumbling block for new projects.

This comes at a time when the slowdown in the economy has been accompanied

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