Exclusive: Subsidy cuts in India's budget may disappoint investors

Fri Feb 20, 2015 4:49am EST
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By Manoj Kumar

NEW DELHI (Reuters) - India may slash its food and fuel subsidy bill by about $8 billion in next week's budget, two sources said, but despite the impressive headline, the cut is not as radical as free market champions had hoped for in Prime Minister Narendra Modi's first full budget.

Most of the 20 percent cut in the budget for subsidies results from lower global oil prices rather than structural changes, with the government's appetite for reform tempered by a heavy local election defeat in New Delhi this month.

"The total subsidy bill could come down to around 2 trillion rupees ($32 billion)," a senior government official, who has direct knowledge of the matter, told Reuters. That calculation was echoed by another source privy to budget discussions.

Fuel subsidies are expected to drop by around two-thirds to 220-230 billion rupees in the fiscal year that starts on April 1, thanks above all to a halving of international oil prices to around $60 a barrel.

The sources said Finance Minister Arun Jaitley was likely to set the total budget for subsidies at about $32 billion, down from $40 billion in the current financial year.

It will be the first full budget presented since Modi's Bharatiya Janata Party swept to power in India last May. It produced an interim budget in July that was largely designed by the outgoing Congress party government.

The numbers imply four-fifths or $6.5 billion of the total subsidy savings will come from lower fuel subsidy costs. Other subsidy costs will only be cut by around 5 percent.

That could disappoint investors, who see the Feb. 28 budget as a test of Modi's stomach for unpopular reforms, with some critical that he has not moved faster to revive the economy.   Continued...

Finance Minister Arun Jaitley gestures during the session in the Swiss mountain resort of Davos January 23, 2015. REUTERS/Ruben Sprich/Files