New Delhi: By freeing diesel prices and (re)launching the bank transfer of the cooking gas subsidy, the Narendra Modi-led National Democratic Alliance (NDA) government has initiated the debate on restructuring subsidies.

After taking charge on 26 May, the BJP-led NDA government gave several indications that it aims to move away from the entitlement-based regime followed by the previous Congress-led United Progressive Alliance government and instead focus on lifting people out of poverty by creating employment opportunities.

Diesel prices will be market-determined and cooking gas subsidy will be directly transferred to beneficiaries’ bank accounts, the Union cabinet decided on Saturday. Apart from ensuring that only the intended beneficiaries benefit, this measure will also prevent leakages. They will reduce subsidy burden and could also help the country secure a rating upgrade from international rating agencies.

The move will also enable the government to meet its fiscal deficit target of 4.1% of gross domestic product (GDP), even after taking into account the expected shortfall in revenue collections.

India’s subsidy bill is budgeted to be at 2.6 trillion, or 2.03% of GDP in the current financial year. Of this, oil subsidies are expected to be 63,500 crore, food subsidies 1.15 trillion and fertilizer subsidies 73,000 crore.

A Union cabinet minister, who did not wish to be identified, pointed out that the government cannot afford to continue with the current subsidy regime. “There are no freebies. We cannot afford to bankrupt the state exchequer," the minister said, signalling the central government’s intent to overhaul the subsidy regime.

While the BJP’s manifesto had promised a continuation of food subsidies, the government is showing its intent to go after other subsidies, analysts say.

“Diesel deregulation was long pending. Now that the government has deregulated diesel, it should move on to addressing the fertiliser subsidy, especially urea," said N.R. Bhanumurthy, professor at National Institute of Public Finance and Policy.

“With the cooking gas subsidy now proposed to be directly transferred into bank accounts of beneficiaries, leakages will come down. The government should look to streamline the public distribution system for effective control over food subsidies," he added.

The Union budget had given some pointers in this regard. “I also propose to overhaul the subsidy regime, including food and petroleum subsidies, and make it more targeted, while providing full protection to the marginalized, poor and SC/STs (people belonging to the scheduled castes and tribes). A new urea policy would also be formulated," finance minister Arun Jaitley had said in his budget speech on 10 July.

The government has already set up an expenditure management commission under former Reserve Bank of India (RBI) governor Bimal Jalan to look into various aspects of expenditure reforms.

A sharp fall in international crude prices has made the immediate task of the commission a bit easier.

“With oil prices falling internationally, diesel is in an over-recovery phase. The pressure on subsidies has clearly eased. It is the best macro-economic environment that we have had in the last few years," Subir Gokarn, former deputy governor of RBI and a member of the commission, said last week at an event organised by the PHD Chamber of Commerce, indicating that the new commission couldn’t ask for more conducive conditions.

Over-recovery is an Indian oil industry term that means fuel marketers are selling fuel at a price higher than their cost of import and refining, thereby making a profit on every unit sold.

The government has benefited from global crude oil prices that have fallen to around $88 per barrel, since deregulating at an earlier time would have forced price hikes and led to inflation, triggering a public backlash. As it turned out, the deregulation actually led to an immediate fall in prices, with diesel costing at least 3 a litre less for end users.

“This government appears to be very lucky from the beginning. Oil prices have eased from around $110 a barrel to around $80 a barrel. They are expected to continue at similar price levels for the next six-nine months. This means that the impact on consumers will only be felt after a few months if international prices firm up and, that too , only in a phased manner," Bhanumurthy said.

He added that the centre could save around 40,000-50,000 crore in subsidies in the current financial year.

Close