Govt signals discomfort with Kelkars oil recipe

Written by fe Bureau | New Delhi | Updated: Sep 29 2012, 11:15am hrs
The Vijay Kelkar panel has drawn a frightening picture of what a do-nothing approach on the fiscal front could lead the nation to and recommended a frontal attack on subsidies among a series of measures that would cause some short-term pain to stem the Centre's worrisome budget deficits.

But the government, acutely aware of political ramifications of the proposals, sought to distance itself from the report.

Stating that some recommendations of the panel appeared contrary to the government's intent to achieve sustained and inclusive growth, the finance ministry said a certain level of subsidies is necessary and unavoidable. The ministry also reiterated its plan to implement the food security Bill.

In its report submitted to the ministry a few days ago but made public by the latter only on Friday, the three-member Kelkar panel set the fiscal deficit target for this fiscal at 5.2% and laid out a medium-term plan to bring it down further to 4.6% in 2013-14 and 3.9% in 2014-15, more or less sticking to the FRBM targets set in the last Budget.

To achieve these targets, it suggested scrapping half of the per-unit subsidy on diesel pegged at R13.5 a litre the report was prepared before the recent diesel price hike in 2012-13 and the remaining half in 2013-14. It also mooted elimination of LPG subsidy by 2014-15 starting with a 25% cut this fiscal and said that kerosene subsidy should be reduced by a third by 2014-15.

Warning that the tax-to-GDP ratio could be just 10.1% this fiscal against 10.6% budgeted in the absence of measures to boost revenue, the panel proposed a comprehensive review of the Direct Taxes Code, among other things, to take the ratio to 10.3% in the year and further to 10.6% and 11.1% in 2013-14 and 2014-15, respectively.

The panel also said the size of Plan expenditure whose base was enhanced in 2008-09 to deliver the fiscal stimulus needs to be rationalised.

Commenting on the recommendations, economic affairs ministry Arvind Mayaram said: We are fully committed to keep fiscal deficit as close to the target as possible and for doing that certain measures have been taken by the government. Disinvestments would net some R25,000-30,000 crore and the spectrum auction was on stream, which wound garner some RR 40,000 crore, he said.

However, he added that critical expenditure commitments will be fully met, especially those pertaining to the poor and vulnerable sections. Wasteful expenditure will be curbed, the official asserted.

The Kelkar panel pegged the nominal GDP growth for 2012-13, 2013-14 and 2014-15 at 13.5% (over quick estimate of the previous year), 14.5% and 15%, respectively.

It said there would anyway be some unintended savings in Plan expenditure, but added that savings under Plan expenditure can be increased by another Rs 20,000 crore by re-allocations across schemes.

To reduce the food subsidy, the panel recommended increase in the central issue price (CIP). Every time the minimum support prices are revised, the CIP should be revised in the same proportion as the MSP.

Regarding subsidy on sugar, there is a need to remove the system of levy sugar, which is only about 10% of the total consumption of the sugar in the country and remove existing controls on the flow of non-levy sugar, it said. It proposed an immediate revision in the price of controlled fertiliser urea.

Referring to the enhanced base on Plan allocation in 2008-09 (34.2% growth over the previous year) which resulted from the expansionary fiscal policy, the panel said this base needs to be corrected in the 12th Plan. It suggested a growth of 15% and 18% in 2013-14 and 2014-15 over the corrected base (26% increase) of 2012-13.

Cross-country benchmarking suggests that India is clearly an outlier in terms of major fiscal indicators and currently has the least room for counter-cyclical fiscal policy measures if conditions take a turn for the worse in global markets.... the panel observed.

The process of fiscal consolidation will no doubt cause some short-term pain, which should be equitably shared. With determined policy action and astute political statesmanship, the pain of voluntary fiscal correction now will forestall the pain of externally enforced involuntary fiscal correction later, the panel said.