Rollback of farm subsidy will put pressure on fiscal deficit

Wednesday, 12 March 2003, 20:30 IST
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The Indian government's pledge to trim ballooning fiscal deficit to spur economic growth has come under a cloud after it scarped a hike in fertiliser prices announced in the federal budget.

NEW DELHI: Experts say the government would not be able to rein in the fiscal deficit, something considered a must to put the economy on a higher trajectory of growth, by stepping up spending on subsidies. "I personally don't think it was a right decision to roll back the fertiliser price hike," said B.B. Bhattacharya, director of New Delhi-based Institute of Economic Growth. "This will mean an additional burden of 7 billion to the government exchequer. This will certainly put more pressure on the already widening fiscal deficit," Bhattacharya told IANS. Bowing to widespread protests in a year of elections, Finance Minister Jaswant Singh Tuesday withdrew a hike in fertiliser prices. The decision will cost the government 7 billion in the year starting April 1. The government had cut fertiliser subsidy by 12 per 50 kg bag of urea and by 10 for other fertiliser in the budget for 2003-04 in a bid to rein in spiralling farm subsidy. The proposal to hike fertiliser prices was among the few controversial decisions in an otherwise populist budget that saw unveiling of a slew of sops for the middle class ahead of a flurry of critical state elections this year. The government spends nearly 300 billion a year on food and fertiliser subsidies, putting pressure on its fiscal deficit, which is expected to rise to 5.9 percent in the current year to March 31 from an earlier forecast of 5.3 percent. The proposal to cut fertiliser subsidy, however, caused a political uproar and drew protests from farmers and opposition parties who said the hike would badly hit agriculture sector that is reeling under the worst drought in three decades. The sector, which provides employment to nearly 70 percent of India's one billion people, contributes some 25 percent to India's gross domestic product (GDP). The government has lowered the economic growth target for the fiscal year ending March 2003 to 4.4 percent from an earlier estimate of 5 to 5.5 percent following a sharp dip in agriculture output. "The hike in fertiliser prices was the only hard-headed initiative in the budget and now that has gone too," moaned Saumitra Chaudhuri, economic adviser at credit rating agency ICRA India Ltd. "The decision was mainly based on political considerations in view of the slew of elections ahead. This roll back will definitely lead to other kind of demands in days ahead," he warned. Chaudhuri said the government was concerned that higher fertiliser prices would alienate voters, affecting the ruling coalition's prospect in elections this year as well as parliamentary polls in 2004. The Indian government plans to restrict the fiscal deficit in the fiscal year 2003-04 to 5.6 percent of GDP. Analysts say the government must rein in the spiralling fiscal deficit that has put obstacles in India's aim to achieve eight percent growth to make a significant impact on poverty. The consolidated deficit of the federal and state governments is estimated at 10 percent. High budget deficit also restricts the government to put the economy in a higher trajectory of growth.
Source: IANS