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Doing away with subsidies
Wed, 21 Jul Pre-Open

India has been the envy of its peers in the West. And why not? The country’s strong trend of domestic consumption has meant that it was better insulated from the shocks of the global financial crisis. As a result of which it has been able to post a much stronger recovery.

That said, there are two major issues which are a thorn on India’s side. One is the problem of high inflation. The other is the problem of a widening fiscal deficit. As growth in India slowed down in FY09 as a consequence of the global crisis, the government was compelled to introduce stimulus measures. These played a role in bloating the fiscal deficit. There are other factors too which have had an adverse impact on government finances. These are the ever increasing subsidies and interest payments.

The Finance Minister in his 2010 Budget Speechhad outlined a roadmap for bringing down the fiscal deficit to 4.1% of GDP by FY13. Some steps have already been taken in this regard. The first is the IPOs of various PSUs where the government has been looking to reduce its stake. This has, however, not garnered much interest. The response from the investor community has been rather lukewarm. The recently concluded 3G auction sales though are expected to go some way in easing the burden of the rising deficit.

The other strategy on the agenda is to reduce the umpteen subsidies. As reported in a leading business daily, India spent about US$ 26 bn in food, fuel and fertiliser subsidies in FY10. The government has chalked out its intention of bringing down this deficit to 5.5% of GDP by the end of this fiscal. A substantial reduction in subsidies therefore is sure to play an important role in achieving this target.

Already, the government has freed petroleum pricing from its control (or so it seems!) and has raised the prices of other fuels. This then is expected to ease its fuel subsidy burden. Whether the same is sustainable going forward remains to be seen.

Indeed, while India is one of the leading contenders in the world as far as growth is concerned, the country’s BRIC peers are not saddled with the kind of deficit that it is seeing now. Certainly, the government’s intention to reduce the same is a step in the right direction. But as is the case with many other issues in India, execution is the key.

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