Kelkar report calls for cut in subsidy, boost in divestment

The Kelkar Committee headed by former finance secretary Vijay Kelkar was directed by the government to lay the roadmap for fiscal consolidation. CNBC-TV18's economy editor Shereen Bhan and Siddarth Zarabi explain various aspects of the report which was submitted to the government.

The report suggests revision of the fiscal deficit target of 5.1% set for this fiscal. The report also places emphasis on fuel price reforms and divestment for fiscal consolidation. The committee has suggested the government increase LPG and diesel prices in the short-term. Meanwhile some of these suggestions have been acted upon already. The government has approved disinvestment in four PSUs As far as FY13 is concerned, the revenue deficit is projected at 4.4 percent, the effective revenue deficit at 2.8 percent, and the fiscal deficit is projected at 6.1 percent of GDP in for a  scenario where no reforms would be announced. The report has projected a fiscal deficit of 5.2 percent of GDP in a scenario where reforms will be announced. The report’s projections for FY14 and FY15 forecast fiscal deficit at 4.6 percent and 3.9 percent of GDP respectively. This would entail therefore clearly a reduction of 60 basis points over the revised estimate for the current fiscal year and then a very sharp reduction, The report focuses on subsidies, tax measures and disinvestment receipts. The subsidies on petroleum, fertiliser and food account for almost 90 percent of the total subsidy bill of the government and after discussions with the ministry of petroleum and the department of fertilizers, the reports suggests a reduction of subsidies by 2 percent in FY14 and 1.8 percent in FY15. On the petroleum subsidy, the Kelkar Committee recommended the price of diesel be increased by Rs 4 a litre, the price of kerosene by Rs 2 per litre, and the price of LPG by Rs 50 per cylinder.
The price of urea needs to be regularly increased to close the gap between urea and phosphatic (P) and potassic (K) fertilisers to enable efficient use of fertiliser and better agricultural productivity.
Regarding food subsidy, the report calls for the need  to increase the central issue price (CIP). And the use of the minimum support price has been advised. The report suggests that the CIP should be regularly revised in the same proportion as the MSP. The committee is of the view that the Food Security Bill maybe appropriately phased taking into account the present difficult fiscal challenge.
The Kelkar Committee report advises the government to adopt a phased method of implementation of the Food Security Bill.
The report concludes that if the suggestions are implemented the total subsidy expenditure could be contained at 2.2 percent of GDP in 2012-2013. The report contains recommendations on tax measures such as the Direct Taxes Code (DTC) Bill.