Panel sees sharp cut in subsidies in 11th Plan

The Planning Commission's projections for the 11th Five Year Plan, starting April 2007, show a sharp decline in subsidies to 0.8 per cent of the gross domestic product (GDP) in 2011-12 from 1.2 per cent in 2006-07, the last year of the 10th Plan.

In effect, this means a sharp cut in the government's subsidy expenditure from the next financial year, considering that the 11th Plan has projected GDP growth of 9 per cent.

Experts are not sure if these targets on subsidies can be met, though the Planning Commission has projected a progressive decline in the subsidy expenditure right through the five years of the 11th Plan "" starting from 1.1 per cent of GDP in 2007-08 to 0.8 per cent in 2011-12.

The central government does not expect a squeeze in expenditure, which it sees being maintained at around 13.93 per cent of GDP during the entire period of the 11th Plan.

The projections also do not expect the net burden on account of pay and allowances to go up, even though a new pay commission has been announced and the impact of its recommendations on the government's salary bill are likely to be felt during the Plan period.

In fact, a 20 percentage point drop has been suggested for the Centre on this head, from 1.0 per cent in 2007-08 to 0.8 per cent in 2011-12. Abhijit Sen, member, Planning Commission, said the Fifth Pay Commission's financial impact was to the tune of nearly 2 per cent of GDP.

For the states also, the impact of the new pay commission's recommendations will be substantial. The projections for state finances expect the net burden on account of pay and allowances to be at 3.10 per cent for the period. The annual burden is expected to go down from 3.24 per cent in 2007-08 to 2.94 per cent by 2011-12.

A recent Fitch Ratings report has also pointed out that most of the states' fiscal woes in the past stemmed from one single item of non-discretionary expenditure "" salaries.

"Salary expenditure remains a cause for concern. An incautious wage increase award by the Sixth Pay Commission could undo things," it added.

However, despite the anxiety, the report states that there are reasons to be hopeful. The states' income is likely to expand due to VAT and other sources, including hiked stamp duty and vehicle registration fees.