Deregulation Template

Written by The Financial Express | Updated: Sep 3 2014, 08:06am hrs
That small-dose, incremental reform measures can yield big results is evident from the fact that the government stands to save nearly R50,000 crore in subsidy outgo for diesel in FY15under-recovery, as of September 1, has fallen to R0.08 per litre. The previous government, in January 2013, rolled out a policy of increasing the price by R0.50 per litre every month. Given that the under-recovery stands effectively eliminated, there is no reason why the diesel subsidy bill should significantly exceed the R9,000 crore incurred in Q1FY15. Given the FY14 total diesel under-recovery stood at R63,000 crore, this means a saving of over R50,000 crore. The softening in international crude prices has, no doubt, helpedthe crude (Indian basket) price stood at $109/barrel in August 2013 while it was $101/barrel on September 1, 2014but the greater part of the savings has to be attributed to the phased decontrol.

With this model of deregulation, the government has the perfect template if it were to move towards eliminating subsidies in LPG as well. The per cylinder under-recovery is R428 and there are 12 crore genuine domestic LPG consumers who receive 12 subsidised cylinders a year; reduction in LPG subsidies, thus, could mean significant savings. There is much lesser legroom in the case of kerosene subsidy, given how it remains a politically sensitive issue. The government could work at lessening the burden here by opting for direct cash transfers to Aadhaar-verified beneficiaries along with LPG.