Budget 2014: How Arun Jaitley Can Cut Subsidies by Rs 60,000 Crore

Finance minister Arun Jaitley, who will present his maiden budget on July 10, faces multiple challenges as far as reviving the economy is concerned. One of the key tasks before him is to contain the fiscal deficit for 2014-15 fiscal within 4.1 per cent of GDP.

According to the roadmap outlined by the Kelkar Committee, fiscal deficit has to be brought down to 3 per cent of GDP by 2016-17. In the 2013-14 fiscal, India's fiscal deficit was 4.5 per cent of GDP.

Most analysts say Mr Jaitley should bring down subsidies, which accounted for 2.2 per cent of GDP in 2013-14, to achieve fiscal consolidation. However, there is little scope for the government to reduce the food subsidy given the fact that it has to adhere to the Food Security Act.

Ashok Gulati, chair professor-agriculture at ICRIER, told NDTV that the government can save Rs 50,000 crore to Rs 60,000 crore annually by making subsidies more targeted and by plugging the leakages in the system. (Watch video)

"Currently the public distribution system has a leakage rate of 40 per cent," said Mr Gulati. "If government wants to implement NFSA (National Food Security Act) through the public distribution system, unfortunately it will drill holes into the budget and not solve the purpose of tackling poverty and hunger," he added.

According to Mr Gulati, the government procures wheat from farmers for its public distribution system (PDS) at Rs 14 per kg. The cost of this wheat, along with storing and distribution costs, later goes up to Rs 24. Now, the government sells the same wheat to farmers at Rs 2 under the PDS. This means the government spends Rs 22 per kg of wheat.

If the government can find ways to pay directly to farmers, say Rs 16 per kg of wheat, then it can save Rs 6 per kg, Mr Gulati says. The farmers will also be happy as they would be getting more for their produce, he added.

Eventually, the government can save nearly 25-30 per cent of the total cost of food subsidy, said Mr Gulati.

He also advised Mr Jaitley to rationalise fertiliser subsidy, which is likely to cost the government Rs 68,000 crore this fiscal. "Give it directly to the farmers on per hectre basis...we have worked it out, you can again save 20-25 per cent easily from that," he added.

If government can save this money and use it to increase investment then it can create employment in the system, he concluded.