Petroleum subsidy dangerous as it's uncapped: Ahluwalia

India’s budget for 2012-13 should send a credible signal on fiscal consolidation by reforming the petroleum subsidy, Montek Singh Ahluwalia, deputy chairman of India’s planning commission, said in an interview.

The government is expected to present a budget in mid-March for the fiscal year that begins on April 1, amid slowing economic growth and mounting concerns about public finances.

New Delhi had budgeted a fiscal deficit of 4.6 percent of GDP for this fiscal year.

However, a slippage on that target is near-certain as a result of sluggish revenue receipts and high spending.

“It is quite clear that it will be very significantly worse. I can’t quantify,” Ahluwalia said in an interview on Wednesday.

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“The markets have to know that the government is not unconcerned about the fiscal deficit, and I am sure the finance minister will be aware that the credibility of our macro-stance next year depends upon both the extent and the quality of the fiscal correction,” Ahluwalia said.

Subsidies that India doles out on fuel, food and fertilizer to help the poor and marginal farmers have been the bane of its public finances.

The original estimate for the fuel subsidy bill for this fiscal year was Rs 23,600 crore , but it is already Rs 30,000 crore more than that figure.

Fertilizer subsidies are set to top Rs 90,000 crore, against about Rs 50,000 crpre originally budgeted.

The rising subsidy bill has compelled New Delhi to seek Parliament’s approval for spending Rs 97,800 crore extra this year.

In a country where any talk of tinkering with subsidies raises a political storm, the government feels it has little option but to pay the increased bills.

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Ahluwalia conceded that reforming the petroleum subsidy would not be easy, but said the government needed to move forward on this after elections in five states in the next few months.

“The credibility on subsidies does not, in my view, depend on what happens on food subsidy because that is a limited capped subsidy. The danger about the petroleum subsidy is that it is an uncapped subsidy,” Ahluwalia said.

“If you were to say, should the government give a credible signal? It is a very tough signal to give. But I agree it should give a credible signal.”

Reuters