Kelkar panel recommends phased elimination of subsidies; Govt rejects

The Committee headed by former Finance Secretary Vijay Kelkar has also suggested a slew of bold measures to cut the subsidy bill, which did not find favour with the government.

New Delhi: Already battling opposition to its reforms measures, the Government has been asked by the Kelkar committee to eliminate various subsidies in phases by hiking prices of LPG, kerosene, diesel and foodgrains in ration shops to deal with the deteriorating fiscal situation.

The Committee in its report has also suggested the government that the excise and service tax rates should be cut to 8 percent over the next few years.

The Committee headed by former Finance Secretary Vijay Kelkar has also suggested a slew of bold measures to cut the subsidy bill, which did not find favour with the government.

Government, which had only recently hiked diesel price and capped subsidised LPG cylinders, said the suggestions were contrary to its established policy of protecting the poor.

The final view on the recommendations of the committee, set up by Finance Minister P Chidambaram to suggest fiscal consolidation road map, will be taken by the government after receiving feedback from stake holders.

Observing that Indian economy may be encountering a "perfect storm" on account of various domestic and global problems, the Committee suggested tough measures to bring down fiscal deficit to 3.9 percent of the Gross Domestic Product (GDP) in 2014-15 from 5.2 percent expected in the current financial year.

Its recommendations include selling of surplus PSU land, fast tracking disinvestment and expanding the service tax net to raise revenue.

It suggested phased implementation of the much-touted Food Security Bill to provide cheap foodgrains to families below poverty line (BPL) in view of the current fiscal situation and pitched for hiking urea prices.

Reacting to the committee's suggestion of eliminating major subsidies, Arvind Mayaram, Secretary in the Department of Economic Affairs said, "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".

"Indian economy is presently poised on the edge of a fiscal precipice, making corrective measures aimed at speedy fiscal consolidation an imperative necessity," said the Committee, which besides Kelkar included Indira Rajaraman and Sanjeev Mishra.

The Committee 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.

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.

It further said that the funds from the monetisation of surplus government land could be made available to fund infrastructure needs of the country.

On the possibility of monetisation of land, Mayaram said, "it is not something where decision has not been taken. But we are certainly not putting sale of land as part of our fiscal consolidation as of today".

The Committee also wants the government to pursue reforms in other sector, like infrastructure, finance, taxation and regulation to improve business climate and spur investment.

It cautioned that in absence of these measures, the fiscal deficit of the government could shoot up to 6.1 percent of the GDP in the current financial year. It can be contained to 5.2 percent with the proposed reforms.

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.

"We feel that if no steps are taken the subsidy expenditure would go up from budgeted 1.9 percent to 2.6 percent of the re-assessed GDP," it said.