Limit on subsidy spend on the cards

The government is considering a proposal to cap expenditure on non-merit subsidies as the first step towards the subsidy reform plan.

Consultations on better targeting of subsidies were kicked off by Finance Minister P Chidambaram today as he laid emphasis on better targeting of food, fertiliser and petroleum subsidies.

He told industry and trade bodies that the government was not focusing on reducing the subsidy burden but wanted food subsidy kept from the non-poor and fertiliser subsidy reached to the farmer instead of companies.

The finance ministry is simultaneously holding discussions with the Prime Minister's Office on the issue. The government's food subsidy bill for the current fiscal is estimated at Rs 26,200 crore, while fertiliser subsidy is estimated at Rs 15,662 crore.

Another Rs 3,500 crore are earmarked for subsidy on kerosene and cooking gas. Chidambaram is scheduled to discuss ways to reducing the petroleum and fertiliser subsidy in the coming days.

The finance ministry is of the opinion that the minimum support price (MSP) should be based on costs covering only the cash component to provide security to farmers and that market forces should determine the market price.

It has also suggested that a maximum procurement price be introduced vis-à-vis the MSP with a 4 per cent tax component. This will serve to negate the statutory levies of states on grain purchases.

States like Andhra Pradesh, Punjab and Haryana have imposed taxes and levies amounting to 10 per cent of the MSP, resulting in an additional burden on the Centre.

It has also been proposed that the current buffer stock norms be reviewed as the food stock in the country is more than sufficient.

On fertiliser subsidy, the government is considering a policy to encourage domestic fertiliser producers to set up plants in countries which have easier availability of natural gas and to share the produce with India and the country where the plant is located.

The move is expected to help a shift towards cheaper fuel options like liquefied natural gas.

The government also proposes to move to a flat subsidy structure for urea in the long term. At present, the government follows a differential subsidy regime for urea with different rates of subsidy for Indian products and imported material.

The government is also of the opinion that the subsidy delivery mechanism, though assured returns to all fertilizer units irrespective of efficiency, coupled with the high cost of indigenous fuel in the production of fertilisers, has resulted in a large part of the subsidy being appropriated by fertiliser units.

Besides, the rising subsidy burden, which now stands at Rs 12, 000 crore, is also a factor prompting the government to take a re-look at the present subsidy regime.