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Saturday, September 29, 2012

Why reforms are necessary?

Kelkar committee on Friday clearly emphasized the precariousness of the Indian economy aggrieved by the subsidy burden. If financial reforms are not pursued seriously then fiscal deficit could even touch 6.1% mark against the FY 13 budget target of 5.1%. Indian government has so far been providing subsidies on Food, Fertilizers and Fuel. Higher fiscal deficit makes the government to borrow more from the market leading to higher interest rates which consequently translates into higher inflation.
Higher interest rates also affect the profitability of the Indian businesses and hamper the flow of foreign funds in the country which finally translates in weaker rupee. Weaker rupee further increases the fiscal deficit and might result in economy going into a spiralling downtrend.
Kelkar committee has recommended the complete abolishing of the Diesel subsidy but in view of coming state (Gujarat) and general elections (2014) this seems impossible.
In the financial year 2012 total petroleum products subsidy was Rs. 1,38,541 crore against the FY 11 figure of Rs. 75,962 crore.
In the absence of the financial reforms, India's credit rating may be downgraded that means foreign debt at higher interest rates. 

Reduction of subsidies shall definitely hurt poor and the lower middle class people, but that's the way our national economic  condition is. Next budget is supposed to be full of populist measures to garner votes in the general elections of 2014 and for the same government needs some room which is being achieved by the present fiscal consolidation.


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