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The end of subsidies?

The end of subsidies?
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First Published: Fri, Feb 26 2010. 11 31 PM IST

 Small share: The government’s flagship programmes such as NREGS and Bharat Nirman have been given modest hikes. Priyanka Parasher / Mint
Small share: The government’s flagship programmes such as NREGS and Bharat Nirman have been given modest hikes. Priyanka Parasher / Mint
Updated: Fri, Feb 26 2010. 11 31 PM IST
New Delhi: Taking a cue from the recommendations of the 13th Finance Commission, finance minister Pranab Mukherjee signalled a shift towards a fiscal policy characterized by expenditure consolidation and fewer subsidies, to help fund physical and social infrastructure.
Small share: The government’s flagship programmes such as NREGS and Bharat Nirman have been given modest hikes. Priyanka Parasher / Mint
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Food, through a targeted public distribution system, fertilizers and petroleum, together account for at least 90% of the government’s subsidy bill.
The Budget has estimated a total subsidy of Rs1.16 trillion in 2010-11.
The government estimates subsidies to fall to 1.5% of gross domestic product (GDP) in 2011-12, and to 1.3% in 2012-13. In 2009-10, the government spent Rs1.31 trillion, or 2.1% of GDP, on subsidies.
The commission, whose report was tabled in Parliament on Thursday, has also recommended a reordering of state spending rather than cutbacks. Criticizing subsidies as “regressive”, the panel, whose suggestions the government has accepted, pointed out that a recent study had found that states with higher incomes often ended up getting more subsidies.
The Union cabinet earlier this month approved a shift to a nutrient-based fertilizer subsidy regime, from the existing product-based one.
In his Budget speech on Friday, Mukherjee said over time, the new regime for fertilizers would reduce the government’s subsidy bill as well as the volatility in the demand for the subsidy.
The commission has also proposed streamlining government expenditure to promote more investment in public assets.
Accordingly, the Plan expenditure has been proposed to be raised by 18.4% against the revised estimates for the current fiscal, and the non-Plan expenditure by 4.1%, bringing the total expenditure growth to 8.5% over the revised estimates for the current fiscal.
In non-Plan expenditure, the major outgo is expected for the modernization of the defence sector and recapitalization of public banks. On planned expenditure, agriculture and allied sectors have been given a major boost.
No major new scheme has been announced in the Budget. The government’s flagship programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme and Bharat Nirman have been given modest hikes. The government, however, focused on shelter for the urban poor.
“The government will be able to stick to fiscal consolidation also because there will not be high expenditure on items such as the Sixth Pay Commission arrears and farm debt waiver that happened in the current fiscal,” expenditure secretary Sushma Nath said.
Mukherjee said decisions on the Kirit Parikh committee’s recommendations on deregulating fuel prices would be taken up by petroleum minister Murli Deora in “due course”. If accepted, this may further enable the government to cut its expenditure.
The Parikh panel had proposed overturning decades of price controls on petrol and diesel, and suggested raising the retail prices of kerosene and liquefied petroleum gas, which are dictated by the government to shield consumers from global market fluctuations.
“We are studying the impact of the proposal’s recommendations,” said Deora. “We expect to take some decision within a week or so. We have to consult several people.”
Mukherjee made sure there were no below-the-line provisions and decided not to issue bonds.
“I have made a conscious effort to avoid issuing bonds to oil and fertilizer companies. I would like to continue with this practice of extending government subsidy in cash, thereby bringing all subsidy related liabilities into our fiscal accounting,” Mukherjee said. He added that the government had managed to reduce the deficit by almost 1 percentage point—from 7.8%, including oil and fertilizer bonds, issued since 2008-09.
The commission, too, had argued against off-budget financing of government programmes.
“It’s a very significant move that he’s brought major off-budget items above the board,” said N.R. Bhanumurthy, a professor with the Delhi-based National Institute for Public Finance and Policy. “He’s also started reducing non-Plan expenditure to 6%. I think the government has started believing that subsidies are not reaching the poor.”
In its road map for reducing subsidies, the finance commission has recommended that the level of food, fertilizer and petroleum subsidies be brought down to a combined 0.88% of GDP by 2014-15.
rahul.c@livemint.com
Utpal Bhaskar contributed to this story.
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First Published: Fri, Feb 26 2010. 11 31 PM IST