Kirit S. Parikh
Former member, Planning Commission
"Cut Petrol, Diesel Taxes; Free Prices"
It would be tempting for the Finance Minister to relax and use this money to reduce the deficit and even postpone taking some of the tough decisions that need to be taken to reduce unnecessary and untargeted subsidies.
How should this money be used? First of all, do not use it to expand subsidies that cannot be effectively targeted. It is best used to promote reforms that are urgently needed and that can ward off many headaches in the future. Use this money to free petrol and diesel prices. How could this be done?
What I suggest is this: Lower taxes to the level at which the current retail price would correspond to a free market price for both petrol and diesel and free these prices. There would be no increase in retail prices and so no political fall out. The only thing that needs to be ascertained is whether the loss in tax revenue can be made up by the bonanza.
This is easy to figure out. The reduction in tax required to move to free market price would be around Rs 2.50 for diesel and Rs 4.50 for petrol (per litre) at a crude price of $75/barrel. The expected consumption of diesel and petrol is around 7,400 crore litres and 2,000 crore litres, respectively, in 2010-11. The loss in revenue on petrol and diesel together, if the current price trend continues for another week or so, would be around Rs 25,000 crore. This is an opportunity to get rid of, once and for all, the problem of under-recoveries on account of petrol and diesel that plague government finances.
What to do with the rest of the money? Part of it should be used to reduce fiscal deficit and part to subsidise poor consumers of 3G-enabled services or increase access to broadband services. If the government wants to use the money for spreading broadband services, my suggestion is to promote development of infrastructure to connect all villages but not subsidise the price of service.
Chief Economist, Enam Securities
"Focus on Physical Infrastructure"
India is a supply-constrained economy. There are huge gaps in terms of physical infrastructure. The best way to channelise this money is to increase India's capital expenditure towards building physical infrastructure such as roads, power and ports. One can argue that even our social infrastructure is equally pathetic, but political differences would make progress on that front difficult. Besides, the returns from physical infrastructure are far higher over a longer period.
But a spike in commodity prices, including crude, would make macromanagement difficult. If oil prices climb back to $80/barrel levels, we may end up using the money in plugging fiscal deficit. Also, it is highly likely that the money will get absorbed to counter the rising fertiliser and food subsidy bill in FY'11. I think it's a one-time bonanza, and government should use the money for nation-building rather than compressing its deficit.
"Cut the Deficit"
The money can be used to plug the deficits (fiscal and revenue). The current fiscal deficit at 6.7 per cent (of GDP) and revenue deficit at 5.3 per cent are alarmingly high. Given government's record of not spending money effectively, it is better to retire debt. This will not only reduce the cost of borrowing but also improve India's image on the global map.
After the Greece crisis, markets across the world are worried about sovereign debt. If India becomes the first country to reduce its debt, it will boost the world's confidence in India. The money can also be used to increase broadband penetration. The rapid deployment of broadband will be of great utility for everyone. With high-speed broadband connectivity, people in rural areas would be able to easily access information on markets, products and latest farming techniques.
So far, we are lagging behind other nations in terms of broadband access. For example, Internet service providers in India offer 256 Kbps and call it broadband; whereas in the US the minimum broadband speed is 1 Mbps.