Time for 'tough' decisions on subsidy front

Finance minister Pranab Mukherjee may have to take tough decisions to bring down the subsidy burden, estimated to touch 2.5 per cent of gross domestic product (GDP) this financial year. Analysts cautioned the government there could be fiscal stress in 2012-13, too, as the burden might touch a high of three per cent of GDP if corrective steps are not taken.

Ahead of the Budget, the PHD Chamber of Commerce and Industry has estimated the subsidy outgo this financial year at 2.5 per cent of GDP. This takes into account two supplementary demands for grants, with a net cash outgo of around Rs 66,000 crore. The third supplementary, which could come in the Budget session, has not been taken into account.

If the government adds Rs 25,000 crore to the subsidy bill for 2011-12, the subsidy would touch 2.75 per cent of GDP, said S P Sharma, chief economist at PHD.

The estimated outgo of subsidies for 2011-12 was Rs 1,43,569 crore. This might reach Rs 2,40,000 crore, according to estimates. For 2010-11, the estimated outgo was Rs 1,16,224 crore, and the outgo was Rs 1,64,152 crore.

D K Joshi, chief economist of Crisil, agreed the situation was bad. “The time has certainly come for the government to answer difficult questions and take tough decisions,” he said. “It is possible.” But the story may go grim the next financial year. If the proposed Food Security Bill turns into an Act, it might add Rs 25,000 crore to the subsidy burden, even on a conservative estimate. “They have to start adjusting petroleum prices and bring it to global levels,” Joshi said, recommending raising service tax from 10 per cent to 12 per cent and widening the tax net.

Another worry is that nominal GDP growth will slow down with low inflation. This, Sharma said, means more subsidy growth for less GDP growth. “If food subsidy is added further and diesel is not de-controlled, there will be no respite for subsidy,” he noted.

The government’s fiscal deficit has already crossed the Budget estimates of 4.6 per cent of GDP for 2011-12. Till January, it touched 4.9 per cent of GDP (advance estimates for 2011-12).

The subsidy burden could be higher than the 2.05 per cent witnessed in the global financial crisis-hit period of 2008-09, when the government was forced to give out more dole.