• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
BW Businessworld

Downturn Over But Subsidy Must Be Slashed

Photo Credit :

Claiming that the "downturn is more or less over", the pre-Budget Economic Survey on Wednesday, 27 February, 2013, projected an optimistic 6.1 to 6.7 per cent growth in the next fiscal and made a strong call for cutting subsidises. At the same time, it is likely to hit its fiscal deficit target of 5.3 per cent despite a significant shortfall in revenue.

Painting a not-so-rosy picture of the Indian economy, the pre-Budget Economic Survey spoke of the "danger" of missing fiscal targets in the current year which may clock only 5 per cent growth against the projected 7.6 per cent and made a case for widening of tax base and cutting of subsidies.

Against the backdrop of speculation over proposals for taxing super-rich and on inheritance, the Survey also cautioned against raising taxes.

While pegging the Gross Domestic Product (GDP) growth at an estimated 5 per cent for the current fiscal, the Survey tabled in Parliament by Finance Minister P Chidambaram said "...the overall economy is expected to grow in the range of 6.1 to 6.7 per cent in 2013-14" as the economy is looking up.

The survey on challenges facing the economy was prepared by Raghuram Rajan, a former chief economist to the International Monetary Fund (IMF) who became the top adviser in the finance ministry last year.

Rajan had previously said that 5.3 per cent was a "tough" deficit target for fiscal 2012-13 (April-March).

Noting that fiscal deficit target for the current financial year would be "breached substantially", the Survey underlined the need for curbing government expenditure.

The report said prioritising expenditure and raising the tax-to-GDP ratio were key to medium-term fiscal consolidation. Chidambaram has vowed to bring the deficit down to 4.8 per cent in the fiscal year that begins in April.

A deficit of 5.3 per cent of GDP would remain the widest spending gap among the BRICS group of major emerging nations, which also includes Brazil, Russia, China and South Africa. It makes credit expensive for the private sector and is the prime reason for threats by ratings agencies Standard & Poor's and Fitch to downgrade India's sovereign credit rating to 'junk' status.

"Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market," the Survey said.

It noted that a beginning has already been made with the decision in September last to raise the price of diesel and again in January to allow oil marketing companies to increase prices in small increments at regular intervals. The number of subsidised gas cylinders has also been capped at 9 per household.

Predicting that the headline inflation will decline to between 6.2 and 6.6 per cent by next month, the Survey said that elevated food inflation would continue to remain an area of concern as it inched towards double digit in December 2012.

The Survey emphasised that efforts will have to be made to contain subsidies through better targeting and for reducing leakages involved in their delivery. One such initiative is direct benefit transfer (DBT) scheme.

It said the government has been calibrating pricing policies to addressing the issue of burgeoning fertiliser subsidy and underlined the need for according priority to food subsidy in view of the under consumption of basic food by the poor and the extant of malnutrition.

Noting that fiscal deficit target for the current financial year would be "breached substantially", the Survey underlined the need for curbing government expenditure.

Such an step, it added, would also help in containing inflation, especially in the food items which has pushed retail inflation to near double digit mark.

"With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached substantially became very real in the current year. The situation warranted urgent steps to reduce government spending so as to contain inflation", it said.

The government had pegged the fiscal deficit for the current fiscal at 5.1 per cent of the Gross Domestic Product (GDP). In view of rising expenditure and subdued revenue collection, Chidambaram raised it to a more realistic level of 5.3 per cent.

The Minister had proposed to bring it down to 4.8 per cent for 2013-14. Some announcements in this regard could be made in the Budget to be unveiled in Lok Sabha tomorrow.

The Survey said that there was across the board slowdown in all sectors during 2012-13 leading to problems in other areas of economy, especially revenue collection. "Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues".

It, however, expressed the hope that measures announced by the government in the recent months would help in restoring the fiscal health of the government and check widening CAD.

The government has recently partially deregulated diesel prices, allowed FDI in multi-brand retail and liberalised foreign investment norms for various sectors.

"With the global economy also likely to recover somewhat in 2013, these measures should help in improving the Indian economy's outlook for 2013-14", the Survey said.