It is unusual for the government to distance itself from key recommendations of an expert committee set up by it on the very day its report enters the public domain. Yet this is precisely what has happened in the case of the panel headed by Vijay Kelkar, whose road map for fiscal consolidation — prepared at the instance of Finance Minister P. Chidambaram — suggests a journey too risky for the tastes of its sponsors. The recommendations in question, calling for “a frontal attack on inequitable subsidies” as a means of dealing with deteriorating government finances, though not new, have always been contentious. More so when they appear, as a government spokesperson claimed, to be contrary to “the objective of sustained and inclusive growth.” Of specific concern is the impact these recommendations might have on the roll-out of the proposed food security bill, which is expected to be the United Progressive Alliance government’s flagship welfare programme, with enormous socio-economic and, potentially, political implications. Not in any hurry to act, the government has circulated the report for wider discussion by all stakeholders.
It is no one’s case that government finances should not be brought under control. High fiscal deficits can lead to higher inflation, reduce room for monetary stimulus, increase the risk of external imbalances and dampen private sector investment, growth and employment. Purely from a technical standpoint, the committee might have presented a case for a midterm correction during the current year and a strategy for the next few years but clearly some of its recommendations fall short of its own requirement of being feasible from the perspective of contemporary political economy. As the Kelkar Committee, and before it, the 13th Finance Commission, found out, striking a balance between the needs of fiscal consolidation and protecting social objectives is a thankless task, at least in the short-term. Drastically pruning food and fuel subsidies, for instance, would aggravate the problems of the poor even if this helps power growth over the longer haul. Mr. Kelkar and his team members are aware of the possibility of their recommended fiscal consolidation measures inflicting pain on the weaker sections but expect everyone to benefit eventually. They are also realistic enough to advocate a gradual approach in phasing out, say, the diesel subsidy. The government’s eventual response to the report should also be guided by similar gradualism. Some of its less controversial recommendations, such as those relating to direct and indirect taxes and monetising surplus government land, deserve more immediate attention.