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Business News/ Politics / Policy/  Union Budget: Govt to overhaul subsidy regime

New Delhi: Finance minister Arun Jaitley on Thursday said the government will overhaul the subsidy regime to ensure that the financial grants for food, fuel and fertilizers reach the targeted beneficiaries, signalling the government’s intention to keep the expenditure under check.

Jaitley has budgeted a marginal 2% increase in subsidies to 2.6 trillion in this fiscal year from the revised budget numbers of the previous year.

The finance minister has done a balancing act by increasing food and fertilizer subsidies, but sharply cutting fuel subsidies. While India spent 92,000 crore on food subsidies in the last fiscal year, the figure this fiscal year is likely to balloon to 1.15 trillion. The second largest subsidy outgo is expected to be on account of fertilizers. While India spent nearly 68,000 crore on fertilizer subsidies last fiscal year, the estimated figure for the current fiscal year stands at around 73,000 crore.

India expects to reduce fuel subsidies by about 22,000 crore this year, suggesting better targeting, along with a possible hike in cooking gas and kerosene prices. While last fiscal year’s spend on petroleum subsidy was 85,480 crore, the figure during the current fiscal year is likely be around 63,500 crore.

Under-recoveries due to losses on sale of diesel fell to a record low of 1.62 per litre in mid-June, raising the prospect of its deregulation. But it went up to 3.04 per litre in the fortnight effective 1 July. If the rupee continues to strengthen and monthly price hikes of up to 50 paise per litre are allowed, diesel prices can be decontrolled by as early as September. However, the government’s estimates could go haywire if the situation in Iraq, India’s second largest crude oil supplier, deteriorates.

K. Ravichandran, senior vice-president and co-head (corporate sector ratings) at Icra Ltd, said the budget emphasizes on reducing fuel subsidies, without giving specific details. “The rationalization of LPG subsidies would play a major role in cutting down fuel subsidies and a concrete plan of action for the same could be imperative," he added.

“The targeted subsidies indirectly point to the Aadhaar system of the previous government. The Aadhaar system is the best institutional mechanism to address the leakages seen in the current subsidy regime. Even if the subsidy bill cannot be substantially reduced, the direct benefit transfer scheme ensures that the benefits reach the right beneficiaries," said N.R. Bhanumurthy, professor at National Institute of Public Finance and Policy.

The finance minister said the government would also announce a new policy on urea, the most-used fertilizer, which is state-subsidized. He, however, did not elaborate. The Economic Survey for 2013-14 said that the government and farmers were together wasting more than 8,500 crore on the fertilizer, and endorsed bringing urea under the nutrient-based subsidy regime.

Jaitley also said the government would set up an expenditure management commission, saying the “time has come to review the allocative and operational efficiencies of government expenditure to achieve maximum output". The overhauled subsidy regime would provide “full protection to the marginalized, poor and SC/STs (Scheduled Castes and Scheduled Tribes)", he said.

D.K. Srivastava, chief policy adviser at EY, said the government must implement cash transfer for the public distribution system (PDS) in such a manner that foodgrain supplies are available in the open market. The current PDS ration system creates a lot of leakages and wastages that can be avoided if the beneficiary is given cash/coupons directly for purchasing from local markets.

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Updated: 10 Jul 2014, 11:59 PM IST
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