Oil Subsidies Must Go To Lower Fiscal Deficit: Parikh

The government must quickly phase out major subsidies in the oil sector to lower the fiscal deficit ratio (FDR) below four per cent, one of the signposts cited for moving towards full float of the rupee, said Kirit Parikh, member of Tarapore Committee on Capital Account Convertibility.

Parikh told reporters here yesterday that it was quite possible for the government to lower the fiscal deficit considerably, which was an essential precursor for the switch-over to free capital account transactions.

Despite having high subsidy levels, the government had proved last year that the fiscal deficit, as a percentage of gross domestic product, can be lowered. By phasing out subsidies, the fiscal deficit can be brought below 3.5 per cent in three years, he said, justifying the three-year period for capital account convertibility (CAC).

 

Ever since the report on CAC was submitted to Reserve Bank of India (RBI) governor C Rangarajan, it has raised considerable debate in the academic, political and financial circles on the three-year time period for the switch-over. While many economists and political parties rejected the time period, most corporate and financial experts welcomed it, saying the country could achieve all the signposts cited in the report for the transition.

Parikh, who is also the director of Indira Gandhi Institute of Development Research, said the government should reform the oil sector immediately. Explaining the basic thrust of the signposts FDR below 3.5 per cent and mandated three-year average inflation rate below 3 to 5 per cent by the end of 2000, Parikh said Its to push the policy-makers to attain sound macro economic fundamentals in a reasonable time-frame.

If one year is bad, say, there is drought or any other natural calamity in some part of the country, it is not possible to have 3.5 per cent FDR. It (FDR) is bound to increase.

The FDR then could be over 3.5 per cent, he said.

Low inflation and FDR are a must, but they can increase depending on the circumstances, he said, adding apart from the government, it was also necessary to push the domestic financial institutions to reform themselves fast to face competition with global banks, he said.

Unless, you have limited time, the institutions wont move fast, which they are otherwise capable of doing so, he said.

Other financial experts said the time-table for CAC was adequate. Bank of Baroda (BoB) chairman K Kannan said the three-year period was enough for the banks to lower their non-performing asset levels (NPAs) once an effective judicial systems like debt recovery tribunals were in place for asset recovery.

Noted forex expert Jamal Mecklai said why should there be any scepticism over the time-frame. We already have CAC for foreign investors and non-resident Indians (NRIs), and in three years it (CAC) will be broadened further.

Bombay Stock Exchange president M G Damani, brushing aside the arguments against the time period, said when Europe can think of having a new currency (Euro) in three years, cant we have a convertible rupee in three years.