HIGHLIGHTS-India's government panel favours cut in subsidies

NEW DELHI, Sept 28 Fri Sep 28, 2012 12:07pm EDT

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NEW DELHI, Sept 28 (Reuters) - India is on the edge of a "fiscal precipice" and it should urgently slash subsidies in diesel and petrol to curb a budget deficit that could hit 6.1 percent of gross domestic product this fiscal year, a government panel said on Friday.(nL4E8KS5GW)

The following are highlights of a report by the three-member panel headed by former finance secretary Vijay Kelkar, which was asked to recommend ways of improving government finances.

THE NEED FOR FISCAL CONSOLIDATION

"We cannot overemphasize the need and urgency of fiscal consolidation. Growth is faltering and inflation seems to be embedded. The external payment situation is flashing red lights," the panel said.

The global economy is likely to be more turbulent, making financing of the large external payment deficits very challenging, it said. "Potentially, if no action is taken, we are likely to be in a worse situation than in 1991."

"DO-NOTHING" SCENARIO

"We are in a state of high fiscal stress, with a 'do-nothing' approach likely to result in a central government fiscal deficit of 6.1 percent of GDP in the current year 2012-13," the panel said.

This could result from a likely shortfall in gross tax revenues by around $11.3 billion and higher than budgeted expenditures on subsidies, by more than $13 billion, it added.

CUTTING BACK ON SUBSIDIES

The subsidy on diesel should be phased out by the end of the 2013/2014 fiscal year and on household cooking gas by 2014-15, and the government should aim to reduce the kerosene subsidy by one-third by 2014-15.

The panel suggested that urea prices be raised to reduce the fertiliser subsidy bill estimated at $5.4 billion.

It also pitched for a progressive reduction in food subsidies and set out the roadmap for bringing down spending on subsidies to 2 percent of GDP in 2013/14 and 1.8 percent in 2014/15.

The panel suggested the direct transfer of subsidy on cooking gas for households, kerosene, fertilisers and food to the bank accounts of beneficiaries to reduce subsidy burden.

EXPENDITURE MEASURES

The government needs to prioritise and efficiently use available financial resources that can save up to $3.8 billion in planned expenditure, about 0.2 percent of GDP, it said.

DISINVESTMENT

To attract more investors and reduce risks for retail investors, the government should set a right sale price for shares while selling stakes in state companies, the panel said.

The government should sell its residual stakes in companies such as BALCO and Hindustan Zinc Ltd to achieve $5.6 billion target in the current fiscal ending in March, it said.

TAX MEASURES

The panel recommended a revamp of tax rules to increase the tax-to-GDP ratio, a cut in factory gate duties and in service tax rates to 8 percent from 12 percent in a phased manner to align the rates with the proposed Goods and Service Tax (GST).

It suggested a comprehensive review of the direct tax code bill, which is pending in parliament. The bill seeks to replace archaic income and wealth tax laws with a modern tax code. ($1=52.84 INR) (Compiled by Satarupa Bhattacharjya and Annie Banerji)

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