new delhi to reign in subsidies

New Delhi to rein in subsidies
By James Lamont in New Delhi

Published: February 24 2010 02:00 | Last updated: February 24 2010 02:00

Cuts to India's costly subsidies on fuel, food and fertiliser are expected to be one of the main goals of the national budget this week as the Congress party-led government seeks to recover from one of the largest fiscal deficits for 20 years .

The roll-back of subsidies, usually given to state-owned companies, is one of the hottest political issues in India, Asia's third-largest economy. Subsidies account for more than 10 per cent of total government expenditure.

Increasingly, senior policymakers identify subsidy reform as a long overdue way of tightening public spending and directing relief more efficiently towards the country's most needy. A lower subsidy bill would help the government trim public spending after New Delhi widened the fiscal deficit to 6.8 per cent last year to protect high growth rates from the global economic downturn.

Montek Singh Ahluwalia, deputy chairman of the powerful planning commission, said the government was "facing very squarely" the issue of energy subsidies, which have shielded consumers from market prices in a country with a severe energy deficit and a per capita income of $1,000 (735, 645) a year.

"It is an exceptionally bad idea to continue with energy subsidies, which means that energy prices would be lower and never go up again," Mr Ahluwalia said. "I cannot say we have dealt with [energy subsidies] but I can say that we are facing that issue very squarely. It would be a bad idea to continue with energy subsidies on the assumption that commodities prices will not rebound after crisis."

The government is considering recommendations by a government commission of experts to ease controls on petroleum product pricing. One of the most significant suggestions is to impose incremental taxation on upstream oil companies when oil prices rise above $60 a barrel.

Some senior finance ministry officials are promoting the introduction of coupons that would entitle the poorest consumers to food, fertiliser and fuel subsidies. They say a government project to introduce nationwide identification cards or numbers, led by Nandan Nilekani, a former Infosys executive, could help target a coupon-based system of subsidies more carefully.

Last week the government eased controls on several fertilisers and raised prices of the popular urea nutrient by 10 per cent, spurring hopes of a wider overhaul of the subsidy system. The fertiliser subsidy rose to Rs758.5bn ($16.4bn, 12.1bn, 10.6bn) last year.

While Friday's budget is expected to draw down some stimulus measures and hurry along the introduction of a goods and services tax, it is also likely to deepen support to the rural economy, one of the top priorities of Manmohan Singh, prime minister.

Mr Singh has plans to supplement the National Rural Employment Guarantee Act, which offers work to the rural poor.

Most analysts view steps towards greater financial liberalisation as off the cards.

Rajeev Malik, analyst at Macquarie Securities, the stockbroking group, said: "Manmohan Singh's Congress-led government remains socialist in its genetic composition but appears to realise that the economic pie has to grow faster to generate resources for its redistributive policies."

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