The Kelkar panacea is nil subsidies

Let’s face the bare truth first. If the finance ministry accepts the Kelkar Committee report, prices of diesel, LPG, and kerosene will go through the roof immediately.

Blaming diesel subsidy for major fiscal slippage in recent years, the Kelkar committee — in its report on fiscal consolidation submitted to the finance ministry on Friday — has pitched for mega subsidy pruning to stem the government’s dwindling finances.

The finance ministry, meanwhile, immediately accorded recommendations contrary to the government objective of “inclusive growth”.

Finance minister P Chidambaram had set up the committee to suggest fiscal consolidation roadmap.

Calling for urgent action on the diesel front, the committee said, “Our policy objective should, at least, aim to eliminate half of the diesel per unit subsidy during by March 31, 2012, and the remaining half over the next fiscal.”

This would straightaway translate into a Rs6.25 per litre rise of the diesel prices. The panel has also suggested the other half should be eliminated by 2014.

Similarly, on the LPG subsidy front, the panel has recommended a 25% cut in subsidy in the current financial year, and the remaining 75% in the next two years. If this translates into a policy, the 12.3 crore households that use LPG will see an immediate hike of Rs86.75 per cylinder.

Indian Oil Corporation has 5.3 crore subscribers and HPCL and BPCL have 3.5 crore subscribers each. Finance minister P Chidambaram has already abolished duties on non-subsidised cylinders to soothe the nerves of the middle class. 

For kerosene, the committee has recommended that the subsidy should be reduced by one third by 2014-15. The committee has also recommended “progressive reduction” in food subsidy and an urgent reform on the fertiliser subsidy front.

Within hours of the submission of the report, the finance ministry declared that some of the recommendations in the report are contrary to the government’s declared objective of “sustained and inclusive growth”.

“The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable, and measures must be taken to protect the poor and vulnerable sections of the society,” said Arvind Mayaram, secretary, department of economic affairs. 

The government has also sent indications that it not likely to relent on the food subsidy front. “It has reiterated its intention to implement the promise of food security for all,” Mayaram said.

With the fiscal deficit for the current financial year likely to touch 6.1% compared with the budgeted 5.1%, it remains to be seen how the government proposes to do the balancing act.

“While taking a final view on the various recommendations of the report, the government will bear in mind that the goal is to achieve high growth, inclusive development, and economic and social justice for all.”

The committee said the reason behind the soaring fiscal deficit is the government’s “do nothing” approach.