The politics of subsidies
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There will be a push to restructure the subsidy regime, as political allies press for their own agenda
The limit on the total subsidy to be handed out by the Centre — at 2 per cent of GDP, according to the budget — has come at a time when coalition politics is becoming more fluid and uncertain. Various parties are in a mood to bargain hard with the government at the Centre by exploiting the prospect, howsoever remote, of a general election getting advanced.
Samajwadi Party leader Mulayam Singh Yadav will not join the UPA because he does not want any negative rub-off from a muddling Congress closer to the general elections in 2014 or earlier. Yet he will support the UPA from the outside so that his party could get goodies from the Centre to make good all the election promises SP has made in Uttar Pradesh. How this will square with the Union budget's commitment to limit subsidies to 2 per cent of GDP is something we will have to wait and see.
Uttar Pradesh Chief Minister Akhilesh Yadav made a sharp comment after Pranab Mukherjee presented the Union budget. Akhilesh said he would find it difficult to accept any decision that puts a burden on the farmers of UP. The subtext was that the Samajwadi Party would not support a sharp hike in the price of diesel, which is currently being sold at well below market prices.
However, the Union budget implicitly assumes that diesel prices will be hiked substantially to keep subsidies at under 2 per cent of GDP or about Rs 1,90,000 crore. This will have to accommodate fertiliser, food and oil subsidies. In 2011-12, the total oil under-recoveries alone are about Rs 1,50,000 crore. Both Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee have said they would "bite the bullet" on the promise of limiting subsidies. Biting the bullet will not be easy in the current political climate.
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