Interest subsidy regime reform likely

NEW DELHI: The government is looking at reforming the interest subsidy regime because of the distortion it causes in the interest rates, looking for options to deliver it more directly so that there is no tinkering with market rates. The options under consideration are a direct viability gap funding or capital support.

The government has budgeted Rs 15,000 crore for interest subsidy, which includes cheaper loans to farmers, students and many exports sectors.

Under the current structure, the banks provide credit at below market rates. The government makes good the difference to banks, accounting it as interest subsidy.

In the case of farm loans, when a farmer repays the loan on time, the rate charged is as low as 4%. “A large number of subsidies are being given out as interest subsidies. This also causes distortion in the interest market,” finance secretary Ratan Watal said at a press conference of secretaries of finance ministry.

“There are various ways of giving subsidies, many sectors, like textile, have to be given. But then it could go as VGF (viability gap funding), it could go as capital support,” Watal added, indicating a recast of the interest subsidy regime. These are more direct measures where the subsidy amount would directly be provided to the beneficiary.

The banks will be free to price their loans as per the market, and thereby remove distortions in rates created by these subsidies. The government is also looking at ways in which the kerosene subsidy can be recast.

Kerosene is the only product that is now under the old regime of under recovery – the product is priced lower than market.Cooking gas is now market priced and subsidy is provided to the beneficiary directly.“ We are now also looking at what to do with kerosene, which is still under the under recovery formula,” Watal said, adding that even on the fertilizer side, lot of action has been taken.

All domestically produced urea is now neem coated, which has helped prevent its diversion. The finance secretary said the public distribution system was also being revamped in consultation with the food department.