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The Economic Survey on Thursday asked the government to decontrol prices of food, fertiliser, diesel and kerosene, saying subsidies given to these sectors have a "questionable" impact.
Freeing prices from government control could help deploy large resources for financing other vital activities in the economy that could promote productivity and eradicate poverty.
"The impact of these (food, fertilisers, kerosene and diesel) subsidies, using the yardstick of poverty mitigation is, however, questionable", the Survey said.
The high level of subsidies "now constitutes a major fiscal burden and tends to crowd out the government's ability to finance other vital activities in the economy that could promote productivity and eradicate poverty," it added.
Already, the government's resources are strained due to various fiscal stimulus and the Survey has separately noted that high growth environment creates scope for partial rollback of these stimuli.
Pointing out it is a 'mistake' to assume that a subsidy scheme has to be coupled with price control, the Survey said: "If we want to ensure that poor consumers are not exposed to the vagaries of the market, the best way to intervene is to help the poor 'directly' instead of trying to control prices."
Once the government becomes involved in setting the price of a commodity, the Survey said, this becomes a matter of politics and lobbying, which cumulatively adds to the distorting and hence prices are best left to the market.
"On agriculture sector policy and price control, there is a need to go the way India did with industry in 1991," Survey prescribed.
Like last year, the Survey has again suggested reform in the public distribution system through direct transfer of food subsidy to poor through 'food coupons'.
"An altered system (food coupons) will be no more costly to run than the existing one and is likely to be much more effective...eventually there will be no need to have separate PDS outlets," it noted.
In 2009-10 fiscal, food subsidy is estimated to be about Rs 60,000 crore (Rs 600 billion), while the outgo on fertilisers is estimated at Rs 70,000 crore (Rs700 billion).