Government must tackle subsidies to restore fiscal discipline: RBI deputy governor

The government must tackle subsidies to restore fiscal discipline, Reserve Bank of India deputy governor Subir Gokarn said today, highlighting tensions between the country's policymakers amid fears that it could suffer a credit rating downgrade.

"We need to address the fiscal situation and we need to address it fully, recognising that not dealing with subsidies is going to provide us very imperfect incomplete solutions," Gokarn told reporters on the sidelines of an industry event in Chennai today.

"Whatever else we may think of in terms of dealing with the fiscal situation, tackling the subsidy bill is going to be a central part of the strategy."

A government panel, sounding a warning on Friday, said India was on the edge of a "fiscal precipice" and should urgently slash fuel, food and fertiliser subsidies to curb a budget deficit that could hit 6.1 per cent of gross domestic product this fiscal year. For the year 2012-13 India was targeting a fiscal deficit of 5.1 per cent of GDP.

The implementation of the proposed subsidy cuts could spark a massive political backlash and jeopardise the ruling Congress party's re-election bid in 2014.

In a bid to control stubbornly high inflation, the RBI has refrained from reducing its key policy repo rate after cutting it by 50 basis points in April, even though economic growth in the June quarter fell to a three-year low of 5.5 per cent.