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Govt sells cash subsidy transfer scheme to woo foreign investors

Chidambaram tells investors subsidy bill may drop by a fifth with the scheme expected to plug leakages
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First Published: Wed, Jan 23 2013. 10 31 PM IST
Finance minister P. Chidambaram. Photo: Reuters
Finance minister P. Chidambaram. Photo: Reuters
Updated: Thu, Jan 24 2013. 12 52 AM IST
New Delhi/Mumbai : Finance minister P. Chidambaram told foreign investors on Wednesday that India’s subsidy bill may drop by a fifth with the direct benefits transfer scheme expected to plug leakages.
Chidambaram, however, warned that political uncertainty in 2014 posed a real risk to the Indian economy, perhaps in an acknowledgement that the country seems to be heading towards a fractured mandate in the general elections due next year.
He also signalled that the finance ministry and the Reserve Bank of India are working together closely, and that the banking regulator has the autonomy to stick to its task of controlling inflation.
The finance minister was addressing a group of investors and companies in Singapore as part of the first leg of a series of roadshows to sell India as an attractive investment destination. He was in Hong Kong on Tuesday and will visit Frankfurt and London next week.
“The FM hoped that the direct benefit transfer scheme would reduce leakage in the subsidy scheme and save subsidies. The pilot projects indicate a saving of 20-60%,” Bank of America Merrill Lynch (BofA ML), which hosted the meeting, said in a note.
The numbers are based on assumptions and without any basis, according to Kunal Kumar Kundu, senior economist and general manager, India, at economic research firm Roubini Global Economics. “The cash transfer scheme is not yet foolproof,” he said. “It is being pushed in a hurried manner without closing the gaps, which politically could also backfire for the government.”
The Congress-led United Progressive Alliance government aims to directly transfer cash subsidies to the beneficiaries of various government welfare schemes using the unique identification number, also known as Aadhaar. A pilot, initially targeting 51 districts, was rolled out for 26 schemes in 20 districts from 1 January.
The finance minister’s comment on his ministry working with the central bank was triggered by reports of differences of opinion between them on issues ranging from the issuance of bank licences to cutting interest rates and propping up economic growth.
“Chidambaram emphasized that there was no disconnect between the government and RBI when it came to tackling inflation,” said an executive with an international bank present at the conference.
This executive, who declined to be identified, described the finance minister as saying there was a healthy debate between the two entities and while the government would look at all potential means of economic growth, it was the central bank’s prerogative to make a call on interest rates.
During the second quarter monetary policy review in October, RBI governor D. Subbarao kept policy rates unchanged citing high inflation, though Chidambaram was keen that the regulator lower rates to spur economic growth. The minister had remarked at the time that growth was as much a concern as inflation.
On the fiscal deficit, Chidambaram reiterated that the government will meet the target of 5.3% of gross domestic product by reducing expenditure and through other austerity measures. He said the government will look to increase revenue by 20% every year but without raising tax rates.
Chidambaram’s comments at the conference showed investors that the government was seized of challenges such as the fiscal deficit and food inflation and was taking steps to deal with them, said Kaku Nakhate, president and country head at BofA ML.
“The government has shown its seriousness on reforms and things have moved in the last four-five months,” Nakhate said. “However, there are still some investors who have the general elections coming up in 2014 in mind.”
In its note, BofA ML stressed that politics will be the focus for markets from late 2013.
“I do not know exactly what he (Chidambaram) has said in Singapore but in 2014, we are sure that the Congress party will succeed to form UPA 3 and will provide a stable government to the country,” said Rashid Alvi, Congress spokesperson.
In Singapore, the finance minister also held out hope on the much-awaited insurance amendment Bill, which seeks to raise the level of foreign direct investment in the sector to 49% from 26%, and the pension fund regulatory and development authority Bill.
He told investors he hopes to pass the insurance and the pension Bills in the budget session of Parliament, Bank of America Merrill Lynch said in a note. “He mentioned that behind the noise, there were quiet negotiations with the opposition parties and support from them,” it said.
On the disinvestment target of $5 billion for this fiscal year ending March, Chidambaram said it could be met. The government has so far garnered $1.7 billion through disinvestments. “There is a timetable for the rest of the fiscal year on disinvestments. NTPC is the next company and can raise around $2 billion,” he said.
The Cabinet Committee on Investments (CCI), which has been formed to fast-track investment proposals, will meet before the end of this month, Chidambaram said, hoping that this will speed up inter-ministerial disputes that hold up projects. “The CCI will take up oil exploration in its first meeting, followed by coal and other minerals,” he added.
In Hong Kong, Chidambaram assured investors that the government would look to meet its fiscal and growth targets but without raising tax rates.
He also said the budget will strive to be pro-poor—an indication that the government will continue to make large allocations to its social sector spending programmes ahead of the general election.
On the proposed goods and services tax, Chidambaram said he hopes to legislate the Bill by December.
Anuja contributed to this
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First Published: Wed, Jan 23 2013. 10 31 PM IST