Committee sets tough fiscal deficit target of 3% in 3 years
After a sweetener in the form of asking the government to mop up tens of thousands of crores by way of selling surplus land held by government departments like the railways and port trusts, the Vijay Kelkar committee on fiscal consolidation has prescribed a very bitter pill for finance minister P Chidambaram. Compared with a likely 6% of GDP fiscal deficit in the current fiscal, the committee is believed to have come out with a 3% fiscal deficit target for 2015-16.
In other words, Kelkar has more or less stuck to the medium-term fiscal deficit targets presented by Pranab Mukherjee as part of the Fiscal Responsibility and Budget Management Act. In March, Mukherjee had budgeted a 5.1% deficit for the current fiscal, going down to 3.9% in 2014-15.
What makes the Kelkar committee target even more daunting, however, is what it says on oil subsidies. Right now, all governments play a big subterfuge by budgeting far smaller amounts than the actual subsidies. Mukherjee’s Budget, for instance, has set aside just R43,580 crore as oil subsidies (R24,901 crore less than that spent in FY12) while the expected subsidy bill is likely to be around R1.6 lakh crore — the balance is to be made good by upstream oil companies like ONGC and GAIL and oil marketing companies like IOC, HPCL and BPCL.
Kelkar has said the government needs to move to free/market pricing of oil products like LPG and diesel in two phases — given the fact that an election is due in 2014, this effectively means Kelkar wants one half of the diesel subsidy (and part of LPG) to be tackled before the election. Given the sensitivity of the UPA’s new and old allies to a hike in diesel prices — the last hike itself took 27 months to fructify! — this could be one of the reasons why the report has still not been made public even though the Prime Minister told the nation that some tough decisions needed to be taken. The committee also discussed the possibility of giving direct subsidies based on Aadhar-linked bank accounts. Since around a fifth of diesel sales are to bulk users, the committee even discussed the possibility of charging bulk users market rates. If the Kelkar recommendations on the oil sector are agreed to, this means the subterfuge of getting oil PSUs to bear part of the government's burden will no longer exist.
UIDAI chairman Nandan Nilekani is already on record as saying he can rapidly roll out a direct cash transfer system should the government give him the okay.
While the money that can be got from selling the surplus land can theoretically be used to help prop up the budget in the way disinvestment/telecom auction revenues do today, getting to actually sell the land will require more than a special effort from the government. While NTC has done a good job in selling mill land in Mumbai, the sale of VSNL's excess land is still not complete more than a decade after the telecom PSU was sold to the Tatas in an auction.