SOW THE SEEDS OF PRUDENCE

New Delhi, Jan. 8: The government plans to cut down the burgeoning subsidy bill by rationalising the assistance given not only to food grains but also to fertilisers and the doles it hands out to the industry.

A complementary plan, which is sure to attract a lot of flak within the coalition government, calls for, among other things, rationalising the food grain procurement system and ultimately instituting a system of price insurance for farmers to ensure food security.

The government’s total subsidy bill, implicit and explicit, has bloated to over Rs 1,10,000 crore or 20 per cent of its total revenues. Direct subsidies to consumers on food, kerosene, cooking gas and fertilisers account for close to a whopping Rs 48,000 crore.

Bowing to pressures from the RJD and CPM, the Centre may decide to stop its open-ended grain purchase policy in Uttar Pradesh, Punjab and Haryana in the forthcoming budget. Instead, it may set purchase quotas for various markets. The allies have been pointing out that the government’s grain procurement policy only focuses on these three northern states.

“This will be a big step towards rationalising the MSP ... prices will not be reduced, but the total amount bought will be controlled,” officials said.

The government also wants to shift grain silos to food-scarce areas and cut down excess stock-holdings in north India. This move alone is expected to save the government about Rs 5,000 crore from the Rs 24,000-crore food subsidy bill.

The government also hopes to start phasing out the contentious fertiliser subsidy this year ? a move it hopes will help save another Rs 2,000 crore.

The report of a group of ministers on this is expected soon. Despite opposition to this policy from both industry and certain political quarters, the government may rationalise the policy of paying out a retention price to urea manufacturers.

The plan also calls for marginally raising the price of cooking gas to reduce the subsidy burden, but there is a stiff political resistance to this and is unlikely to materialise.

Many coalition partners do not favour tinkering with the cooking-gas price with elections due at several states, including Bengal. The Left parties are, of course, against this measure.

The government also plans to significantly rationalise industrial subsidies in the forthcoming budget as they account for a huge indirect dole paid out by it.

Finance minister P. Chidambaram and plan panel deputy chairman Montek Singh Ahluwalia have conferred on the issue. Hosts of tax exemptions will be done away with, while many subsidy schemes will be modified to make them WTO-compatible.

Officials said the definition of subsidies in the WTO Agreement on Subsidies and Countervailing Measures strikes down any dole paid out in the form of income or price support or as grants and loans or even as loan guarantees.

Under the agreement, fiscal incentives like tax credits are also inadmissible. Officials said, “This means much of what we are doing now can be deemed as non-permissible subsidy by the WTO.”

The most obvious subsidy practices, which could be targeted, are grant of cheap loans and loan guarantees to PSUs, the retention price scheme for urea and schemes like the supply of natural gas to industry at less than international parity prices.

Besides this, the government is also mulling limiting tax subsidies to small-scale firms above a certain turnover.

It also favours cutting down all tax exemptions based on mere locational advantage, such as backward areas. This will simplify the tax administration more than anything else.

WTO disciplines on other industrial subsidies are, however, relatively benign. The level of subsidies cannot be raised once a tariff commitment has been made. But they can be retained.