Kelkar Committee Report on Fiscal Consolidation

Introduction

Fiscal discipline and stability are crucial for any economy aiming for sustainable growth. In India, fiscal deficits have historically been a recurring concern due to high expenditure on subsidies, welfare schemes, and developmental projects, combined with limited revenue mobilization. To address the growing fiscal imbalance, the Government of India has constituted various committees from time to time. One of the most significant among these is the Kelkar Committee on Fiscal Consolidation, set up in 2012.

The committee, chaired by Dr. Vijay Kelkar, was tasked with preparing a roadmap for fiscal consolidation in India at a time when the economy was struggling with a high fiscal deficit, widening current account deficit, and weakening investor confidence. Its recommendations were comprehensive, aiming to restore macroeconomic stability and ensure sustainable fiscal management.

This article provides a detailed analysis of the Kelkar Committee Report, including its background, objectives, major recommendations, and its implications for the Indian economy.

Background of the Kelkar Committee

By 2012, the Indian economy was facing serious fiscal challenges. The global financial crisis of 2008 had already slowed growth, and domestic pressures such as high subsidies on fuel, fertilizers, and food further strained government finances.

The fiscal deficit of the Government of India had widened significantly, standing at around 5.9% of GDP in 2011–12, and the current account deficit had reached alarming levels. These imbalances threatened India’s investment climate, inflationary situation, and long-term sustainability.

In this backdrop, the government set up the Committee on Roadmap for Fiscal Consolidation in August 2012 under the chairmanship of Dr. Vijay Kelkar, a noted economist and former Finance Secretary. The committee was asked to suggest corrective measures for fiscal consolidation without compromising economic growth.

Objectives of the Kelkar Committee

The Kelkar Committee was constituted with clear and targeted objectives. These included:

1. To assess the nature of India’s fiscal challenges and examine the sustainability of current fiscal trends.
   
   
2. To recommend a roadmap for reducing the fiscal deficit to sustainable levels, in line with the targets under the Fiscal Responsibility and Budget Management (FRBM) Act.
   
   
3. To review subsidy policies and suggest rationalization of subsidies without harming the poor.
   
   
4. To identify measures for revenue mobilization through better taxation policies and improved tax compliance.
   
   
5. To ensure long-term macroeconomic stability by creating a balance between growth, equity, and fiscal prudence.
   
   
6. To restore investor confidence by making India’s fiscal environment more predictable and stable.

Key Challenges Identified by the Kelkar Committee

Before making recommendations, the committee highlighted several challenges in India’s fiscal management:

• High fiscal deficit: The government’s fiscal deficit had crossed sustainable limits, creating inflationary pressures.
  
  
• Large subsidy burden: Fuel, fertilizer, and food subsidies consumed a significant share of government expenditure.
  
  
• Revenue shortfall: Tax-to-GDP ratio was low compared to other emerging economies, limiting fiscal space.
  
  
• Rising public debt: High borrowings increased interest payments, leaving less room for developmental spending.
  
  
• External vulnerabilities: High current account deficit and volatile global markets created instability.

Major Recommendations of the Kelkar Committee

The Kelkar Committee’s recommendations were bold and comprehensive, focusing on both expenditure reforms and revenue mobilization. Some of the major recommendations include:

1. Rationalization of Subsidies

• The committee argued that unchecked subsidies were the main reason for the fiscal imbalance.
  
  
• It recommended a gradual reduction in subsidies, particularly fuel subsidies, to contain fiscal pressures.
  
  
• It proposed a move towards direct cash transfers to the beneficiaries instead of price subsidies, ensuring better targeting and reducing leakages.
  
  
• Fertilizer subsidies were to be restructured by linking them to nutrient content rather than specific products.

2. Control on Fiscal Deficit

• The committee warned that if corrective measures were not taken, the fiscal deficit could rise to 6.1% of GDP in 2012–13 and 6.9% of GDP in 2013–14, pushing the economy into a crisis.
  
  
• It suggested bringing down the fiscal deficit to 3% of GDP by 2016–17 in line with the FRBM Act.

3. Tax Reforms and Revenue Mobilization

• Strengthening the Goods and Services Tax (GST) framework to broaden the tax base.
• Enhancing direct tax collections by reducing evasion and improving compliance.
• Minimizing tax exemptions to increase government revenue.
• Encouraging states to improve their tax collection efficiency.

4. Expenditure Management

• Reducing non-plan expenditure (like subsidies, defense pensions, and administrative costs).
• Prioritizing plan expenditure (developmental spending) in sectors like health, education, and infrastructure.
• Better monitoring of public expenditure to ensure efficiency and accountability.

5. Energy Pricing Reforms

• Phasing out diesel, kerosene, and LPG subsidies.
• Moving towards market-based pricing for petroleum products to reflect global crude oil prices.
• Providing targeted subsidies to the poor through direct transfers instead of universal price subsidies.

6. Public Debt Management

• Controlling borrowing to prevent crowding out of private investment.
• Reducing reliance on short-term borrowing and adopting a more sustainable debt strategy.

7. Long-Term Structural Reforms

• Strengthening the FRBM framework with enforceable fiscal rules.
  
  
• Setting up an independent Fiscal Council to monitor fiscal performance and recommend corrective measures.
  
  
• Promoting fiscal federalism by providing more resources and autonomy to states, while ensuring accountability.

Kelkar Committee’s Warning

One of the most striking aspects of the report was its warning of an impending fiscal crisis. The committee stated that if corrective action was not taken immediately, India could face a situation similar to the 1991 balance of payments crisis.

It cautioned that:

• High deficits could fuel inflation.
• Rising debt would limit fiscal flexibility.
• Investor confidence could weaken, leading to reduced foreign investment.
• The Indian rupee could come under pressure, worsening the current account deficit.

This warning played a crucial role in pushing policymakers to take the committee’s recommendations seriously.

Reception of the Report

The Kelkar Committee Report generated considerable debate in policy and academic circles.

• Support: Economists and international agencies like the IMF welcomed the report, noting that its recommendations were bold and realistic. They appreciated the emphasis on fiscal prudence and subsidy rationalization.
  
  
• Criticism: Some critics argued that reducing subsidies, especially on fuel and food, would hurt the poor. Political parties were reluctant to accept recommendations that could be unpopular among the masses.

Despite resistance, the report set the stage for important reforms, particularly in subsidy management and fiscal responsibility.

Impact of the Kelkar Committee Report

The Kelkar Committee’s recommendations had both short-term and long-term impacts on India’s fiscal policy.

Short-Term Impact

• The government reduced diesel subsidies and allowed gradual price hikes.
• LPG subsidy reforms were introduced, including capping the number of subsidized cylinders.
• Fertilizer subsidy reforms were initiated, though not fully implemented.
• Efforts were made to control fiscal deficit, which fell to 4.9% of GDP in 2012–13 from 5.9% in 2011–12.

Long-Term Impact

• The idea of Direct Benefit Transfer (DBT) gained momentum, becoming a cornerstone of welfare delivery in India.
  
  
• Energy pricing reforms were gradually implemented, with deregulation of petrol and diesel prices in later years.
  
  
• The report laid the foundation for the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2017), which further refined fiscal targets.
  
  
• It created awareness about the risks of fiscal profligacy and the need for structural reforms.

Kelkar Committee and FRBM Targets

The Kelkar Committee strongly aligned itself with the objectives of the FRBM Act, which aimed to institutionalize fiscal discipline in India. It argued that:

• Fiscal deficit must be reduced to 3% of GDP to ensure long-term stability.
• Revenue deficit should be minimized, as borrowings must be used only for productive investment, not for day-to-day expenses.
• Transparency and accountability in government finances were critical to fiscal consolidation.

These ideas later influenced future fiscal frameworks, including the recommendations of the FRBM Review Committee headed by N.K. Singh in 2017.

Criticism of the Kelkar Committee Report

Although influential, the report was not free from criticism. Some of the major criticisms were:

1. Overemphasis on Cutting Subsidies
   • Critics argued that subsidies on fuel, fertilizers, and food were essential for supporting the poor, and reducing them would increase inequality.
     
     
2. Political Feasibility
   • The recommendations were considered politically difficult to implement, especially in a democracy where populist measures dominate policy.
     
     
3. Neglect of Growth Concerns
   • Some economists believed that focusing too much on deficit reduction could hurt growth by reducing public expenditure.
     
     
4. Partial Implementation
   • Many recommendations were implemented only partially, limiting the effectiveness of the roadmap.

Relevance of the Kelkar Committee Report Today

Even more than a decade later, the Kelkar Committee Report remains relevant for India’s fiscal policy. Issues such as rising subsidies, fiscal deficit, and public debt continue to challenge the government.

• The push for direct transfers, initiated by the committee, has become mainstream with schemes like DBT for LPG (PAHAL scheme) and PM-Kisan.
  
  
• Fiscal deficit targets under the FRBM framework are still guiding policy.
  
  
• Discussions on fiscal consolidation, subsidy reforms, and public debt management continue to draw inspiration from the Kelkar Report.

In the post-COVID era, when fiscal deficits have again widened due to increased spending on health and welfare, the Kelkar Committee’s emphasis on prudence, efficiency, and sustainability is more relevant than ever.

Conclusion

The Kelkar Committee Report on Fiscal Consolidation marked a turning point in India’s fiscal management. By clearly identifying the risks of unchecked deficits and subsidies, and by proposing a roadmap for sustainable fiscal management, the committee emphasized the importance of balancing growth with stability.

Although politically challenging, its recommendations paved the way for reforms in subsidy management, direct benefit transfers, and fiscal responsibility. The report highlighted the dangers of fiscal profligacy and underscored the need for prudent, transparent, and accountable financial governance.

In sum, the Kelkar Committee played a crucial role in shaping India’s fiscal policy framework and continues to remain a guiding document for policymakers striving for fiscal discipline in a rapidly changing economic environment.