Narendra Modi govt may clamp down on subsidies

Written by Anil Sasi | New Delhi | Updated: Jun 15 2014, 15:54pm hrs
Narendra ModiThe 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
Prime Minister Narendra Modis reference to tough decisions by his government to fix the countrys 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 Ministers 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 tacklinghigh 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 by a sharp decline in private investment.

Fixed capital formation, a good measure of value added through capital investments in the private sector, nosedived by 40 per cent from 14.26 per cent of GDP in FY08 to 8.46 per cent in FY13. Reviving this should be central to any attempt at improving the economy, which would need changes to some of the regressive measures clauses in the new land acquisition legislation.

While the rise in the stock markets broadly indicates the flow of funds from FIIs, to ramp up foreign direct investment in various manufacturing sectors could mean lifting the investment caps, including in sectors such as multi-brand retail.

These decisions too, could extract a political cost.