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India's subsidy woes continue, unless
Thu, 15 Mar Pre-Open

Mr Pranab Mukerjee is set to take center stage in a few days. The Union Budget - 2012 will help us get a deeper understanding of India's fiscal position. This is a key number that will help cement whether India's long term story remains intact or there is a need to reassess the situation. The current fiscal deficit has already crossed the Budget estimates of 4.6% of GDP for 2011-12. Till January, it touched 4.9% of GDP. If this increase is not controlled it may adversely impact the country.

To add to the weakness of government finances, India's subsidy burden has now reached a ten year high. The subsidy outgo is massive. The food subsidy bill for the current fiscal is projected to be Rs 605 bn. Fertilizer subsidy during the year is expected to be Rs 500 bn. But, the fossil fuel subsidy of Rs 1.2 trillion leaves these figures far behind. However, the bleeding oil marketing companies will need to pool in for a chunk of this figure. Incidentally, these are all state owned companies so it is basically government money that is going down the drain. The estimated outgo of subsidies for 2011-12 was Rs 1.4 trillion. This may even reach Rs 2.4 trillion, according to estimates.

The finance minister needs to address the subsidy burden issue urgently. High prices of crude oil and other commodities have help contribute to the increase in the subsidy burden for the year. This level is expected to reach 2.5% of the country's GDP, the highest level seen in a decade. The current level may even surpass the high point seen during the FY09 financial crisis when the subsidy figure stood at 2.3% of GDP. If corrective action is not taken soon, this level may even reach 3% of GDP.

But, that's not all. There are a lot of other negatives on the horizon. If the proposed Food Security Bill turns into an Act, it might add Rs 250 bn to the subsidy burden, on a conservative estimate. Another worry is that nominal GDP growth will slow down with low inflation. A lower denominator effect coupled with high fuel prices and an increased food subsidy outlay will lead to a higher subsidy figure. We hope the new version Union Budget has a solution for deteriorating India's fiscal balances. Else, there may be some more trouble on the economy front going forward. Fiscal consolidation is definitely the need of the hour.

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