Already battling opposition to its reforms measures, the Government has been asked by the Kelkar committee to eliminate various subsidies in phases by hiking prices of LPG, kerosene, diesel and foodgrains in ration shops to deal with the deteriorating fiscal situation.
The Committee headed by former Finance Secretary Vijay Kelkar has also suggested a slew of bold measures to cut the subsidy bill, which did not find favour with the government. Government, which had only recently hiked diesel price and capped subsidised LPG cylinders, said the suggestions were contrary to its established policy of protecting the poor.
The final view on the recommendations of the committee, set up by Finance Minister P Chidambaram to suggest fiscal consolidation road map, will be taken by the government after receiving feedback from stake holders.
Observing that Indian economy may be encountering a "perfect storm" on account of various domestic and global problems, the Committee suggested tough measures to bring down fiscal deficit to 3.9 percent of the Gross Domestic Product (GDP) in 2014-15 from 5.2 per cent expected in the current financial year.
Its recommendations include selling of surplus PSU land, fast tracking disinvestment and expanding the service tax net to raise revenue. It suggested phased implementation of the much-touted Food Security Bill to provide cheap foodgrains to families below poverty line (BPL) in view of the current fiscal situation and pitched for hiking urea prices.
Reacting to the committee's suggestion of eliminating major subsidies, Arvind Mayaram, Secretary in the Department of Economic Affairs said, "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".
With regard to fertiliser subsidy the Committee said that there was urgent need to increase urea price saying it would close the wide gap between nitrogenous fertiliser and P&K fertiliser to encourage efficient use and improve farm productivity.
The Committee said that the issue price of food grains at ration shops should be increased in tandem with hike in Minimum Support Price (MSP). The panel wants government to do away with sugar subsidy, which account for just 10 per cent of total consumption. It also wants the government to pursue reforms in other sector, like infrastructure, finance, taxation and regulation to improve business climate and spur investment.
It also wants that implementation of the Food Security Bill to provide cheap grains to persons below poverty line, be "appropriately phased" in view of difficult fiscal challenges. Policy interventions, the panel said, is also needed to limit the shortfall in the tax-GDP ratio in 2012-13 to 10.3 percent from 10.1 percent in the previous fiscal. In absence of reforms it could deteriorate to 10.1 per cent on account of shortfall in collections.
The Kelkar panel has cautioned that absence of quick credible steps to correct fiscal situation is likely to result in sovereign credit downgrade and flight of foreign capital. "The situation is all the more dangerous now, much more than so in the past, because we have a surge in the young people looking for jobs...If growth slips to say 6 percent or below, and employment growth slows below 2.4 percent, unemployment would rise," the report said.
It also emphasised that growth is faltering and external payment situation is flashing red light. "The global economy is likely to be more turbulent, making financing of large external payment deficit very challenging.
Potentially if no action is taken, we are likely to be in a worse situation than in 1991 for several reasons ... In other words our economy may be encountering a perfect storm," it said.