Markets: Eerie calm

Markets: Eerie calm

it is not clear when market sentiment can change; as in the past, it can be quite sudden.
At a turn and yet not

At a turn and yet not

RBI could be tempted to cut policy rate to support growth at its bi-monthly review.

P Chidambaram eyes $15 bn rollover of subsidy costs into next budget

Oct 25 2013, 09:53 IST
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P Chidambaram had said earlier this month that the jump in subsidy spending must be tackled sooner rather than later to help stabilise the economy. P Chidambaram had said earlier this month that the jump in subsidy spending must be tackled sooner rather than later to help stabilise the economy.
SummaryChidambaram insists that fiscal deficit target of 4.8% of GDP is a red line that will not be breached.

critical factor will be whether Chidambaram can gather government support to raise domestic fuel prices to offset ballooning subsidy costs. Some policymakers see that as politically unpalatable ahead of state elections in December, leaving a small window after those votes before the country moves into national elections.

A finance ministry spokesman, D.S. Malik, said it was "too early to say anything at this stage" on how much the rollover would be.

Chidambaram had planned to cap the subsidies for the likes of fuel and food at 2 per cent of GDP, or about $38 billion. But finance ministry officials said it could cost as much as 2.9 percent of GDP, or $55 billion, this fiscal year.

Chidambaram had said earlier this month that the jump in subsidy spending must be tackled sooner rather than later to help stabilise an economy shaken this year by the rupee's slump and a record current account deficit. India imports nearly 80 percent of its oil needs and the rupee drop made government fuel subsidies more costly.

SOARING SUBSIDY BILL

Finance ministry officials in September called for an increase in diesel prices of close to 10 percent to offset the pressure on the subsidy bill.

But Prime Minister Manmohan Singh has shied away from raising fuel prices for fear it could upset voters and cost his Congress party the elections.

At the same time, international oil prices have remained stubbornly high and although the rupee has climbed up from its record low, it remains historically weak.

A new law to provide cheap grains to millions of people has increased procurement and storage costs, inflating food subsidies by around 10 percent. Adding to Chidambaram's headache, the fertiliser ministry has asked for a 50 percent hike in its budgeted subsidy.

"The budget will simply collapse, if we continue to provide subsidies on this scale," said a finance ministry official. "There is no alternative to a 3-5 rupees increase in diesel prices."

ASSUMPTIONS

It is not unusual for the government to rollover some costs into the following year's budget, although they are not publicly revealed. However, subsidy spending has massively overshot budgeted estimates for the last three fiscal years forcing up the amount of cost that the government rolls over.

If the economy was booming, Chidambaram would have easily absorbed higher subsidy costs. But GDP rose 5 percent in 2012/13, the weakest pace in a decade. Most analysts expect growth to weaken further this fiscal year, although the budget assumed

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