Budget 2012: Trim subsidy burden and speed up reforms, says FM

New Delhi: Finance Minister Pranab Mukherjee proposed trimming the government’s subsidy burden and called for speeding the pace of economic reforms, which have been stalled by political gridlock, in his budget speech on Friday.

High oil prices have swelled India’s subsidy burden to roughly 2.5 percent of GDP and Mukherjee called for reducing that to less than 2 percent in the fiscal year that starts on 1 April.

“We have to accelerate the pace of reforms,” he told Parliament.

India is under pressure to trim the country’s fiscal deficit amid cooling economic growth and a crisis of stability for the coalition government.

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Mukherjee set a target of selling 300 billion rupees worth of stakes in state companies in the next fiscal year, roughly in line with forecasts. India has raised just 139 billion rupees in the current fiscal year from stake sales, far below its budget target of 400 billion rupees.

The government’s move on Wednesday to raise railway fares for the first time in eight years sparked an intense backlash from the Trinamool Congress, further eroding its ability to make politically tough decisions such as raising diesel prices in order to ease its fiscal deficit.

Mukherjee said he expects the economy to grow by 7.6 percent in the fiscal year starting in April, up from an expected 6.9 percent in the current year but below the 8.4 percent growth of the previous fiscal year.

Prime Minister Manmohan Singh’s government was already reeling from a dismal showing in recent state elections and more than a year of corruption scandals that have resulted in policy gridlock.

With general elections set for 2014, the budget a year from now is expected to be laden with populist spending measures. Friday’s budget is thus viewed as a last opportunity for Singh’s government to roll back a yawning fiscal gap.

India’s fiscal deficit for the year that ends this month is expected to exceed the target of 4.6 percent of GDP by more than a percentage point after economic growth slowed, the subsidy bill ballooned on higher oil and commodity prices and weak markets undermined efforts to sell state assets.

High inflation forced the RBI to continue raising interest rates even as its counterparts elsewhere turned their focus towards reviving growth. While inflation is no longer near double digits, it rose to 6.95 percent annually in February.

On Thursday, the central bank disappointed market hopes that it would begin cutting interest rates after 13 increases between March 2010 and October 2011, and warned of renewed inflationary risks from high oil prices, a depreciation of the rupee and “fiscal slippage”, a reference to the government’s deficit.

Reuters