New Delhi: The Kelkar Committee has recommended sharp reduction in subsidies on petroleum, food and fertiliser, which the government said was contrary to its policy of protecting the poor.
"The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable, and measures must be taken to protect the poor and vulnerable sections of the society", Department of Economic Affairs (DEA) secretary Arvind Mayaram said on Friday.
He further said Committee's recommendation of withdrawal of certain subsidies is in divergence with the stated policy of the government.
The government, he clarified, has not yet taken a view on the recommendations of the Kelkar Committee, which was set up by Finance Minister P Chidambaram to suggest a roadmap for fiscal consolidation.
The government has invited comments of stakeholders on the Kelkar panel report.
The Committee, headed by former Finance Commission Chairman Vijay Kelkar, has suggested phased elimination of subsidy on diesel and LPG in the next four years and reduction in kerosene subsidy by one-third by 2014-15.
In case of food and fertiliser subsidies, the Committee wants the government to increase the urea price and raise issue price of foodgrains at ration shops.
It cautioned that in absence of these measures, the fiscal deficit of the government could shoot up to 6.1 percent of the Gross Domestic Product (GDP) in the current financial year. It can be contained to 5.2 percent with the proposed reforms.
The government's guarded reaction to the recommendations comes in wake of widespread protest against its recent decision to raise price of diesel by Rs 5 per litre and capping of subsidised LPG to six per family a year.
The panel has also suggested that over the next two-three years the government should raise resources by selling unutilised and under-utilised land of PSUs, Port Trusts, Railways, etc., to fund infrastructure sector.
On disinvestment side, the Committee said that in absence of adequate steps the government will be able to raise around Rs 10,000 crore, as against the target of Rs 30,000 crore.
The budget target of Rs 30,000 crore, the panel said, could be met by the government by selling minority stakes in companies like SUUTI, Hindustan Zinc and Balco.
With regard to petroleum subsidy, the Committee suggested that the government should seek to eliminate diesel subsidy by 2013-14 and "our policy goal should be to eliminate the LPG subsidy by 2014-15 by reducing it by 25 percent this year, with the remaining 75 percent reduction over the next 2 years".
"For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15. Our recommendation is to immediately increase the price of diesel by Rs 4 per litre, of kerosene by Rs 2 per litre and of LPG by Rs 50 per cylinder," it added.
The government had on September 13, raised the price of diesel by over Rs 5 per litre and capped the number of subsidised LPG cylinders at 6 per family per year.
He further said the fertiliser and food subsidies are expected to exceed the budget estimates by Rs 10,000 crore each. In the 2012-13 Budget, the fertiliser subsidy was pegged at Rs 60,974 crore and the food subsidy at Rs 75,000 crore.
"Overall, we feel that if no steps are taken the subsidy expenditure would go up from 1.9 percent of the budgeted levels to 2.6 percent of the re-assessed GDP," it said.
As per the roadmap suggested by the committee, the fiscal deficit should be brought down to 4.6 percent of GDP in 2013-14 and 3.9 percent by 2014-15. With regard to fertiliser subsidy the Committee said that there was urgent need to increase urea price saying it would close the wide gap between nitrogenous fertiliser and P&K fertiliser to encourage efficient use and improve farm productivity.
The Committee said that the issue price of food grains at ration shops should be increased in tandem with hike in Minimum Support Price (MSP).
The panel wants government to do away with sugar subsidy, which account for just 10 percent of total consumption.
It also wants the government to pursue reforms in other sector, like infrastructure, finance, taxation and regulation to improve business climate and spur investment.
It also wants that implementation of the Food Security Bill to provide cheap grains to persons below poverty line, be "appropriately phased" in view of difficult fiscal challenges.
Policy interventions, the panel said, is also needed to limit the shortfall in the tax-GDP ratio in 2012-13 to 10.3 percent from 10.1 percent in the previous fiscal. In absence of reforms it could deteriorate to 10.1 percent on account of shortfall in collections.
The Kelkar panel has cautioned that absence of quick credible steps to correct fiscal situation is likely to result in sovereign credit downgrade and flight of foreign capital.
"The situation is all the more dangerous now, much more than so in the past, because we have a surge in the young people looking for jobs...If growth slips to say 6 per cent or below, and employment growth slows below 2.4 percent, unemployment would rise," the report said.
It also emphasised that growth is faltering and external payment situation is flashing red light.
"The global economy is likely to be more turbulent, making financing of large external payment deficit very challenging. Potentially if no action is taken, we are likely to be in a worse situation than in 1991 for several reasons ... In other words our economy may be encountering a perfect storm," it said.