Scrapping diesel subsidy: Finance Ministry readies proposal for Narendra Modi govt

Written by Arup Roychoudhury | New Delhi | Updated: May 20 2014, 15:27pm hrs
Diesel subsidyThe Kirit Parikh committee had said there could be a cap on diesel prices at Rs 6/litre.
Finance ministry officials have readied a proposal for the consideration of the new minister under Narendra Modi dispensation, set to assume office in a few days, for elimination of the subsidy on diesel. As part of its to-do list, which will be presented to the incoming finance minister, the economic affairs department will also recommend gradual lifting of quantitative and tariff restrictions on import of gold.

Oil marketing companies under-recoveries on diesel amounted to Rs 62,837 crore in FY14, out of the total under-recovery of Rs 1,39,869 crore on petroleum products.

Faced with a high fiscal deficit, the Manmohan Singh-led government had decided to cut down on fuel subsidy by increasing diesel prices in small doses of 45-50 paise every month starting January 2013. A direction to this effect was issued to OMCs but there hasn't been a formal decision to eliminate the subsidy. In January 2013, diesel under-recoveries were about Rs 13 per litre. They now stand at Rs 4.41/litre.

The Kirit Parikh committee had said there could be a cap on diesel prices at Rs 6/litre. During the recent polls, the government did not hike diesel prices.

But finance ministry officials differ with the Parikh committee recommendations and feel the subsidy on diesel should be eliminated. However, it is not clear yet whether there would be a sharp Rs 4-5/litre increase in price to wash off all under-recovery, or a gradual 50-paise to one-rupee increase, as has been the practice since the start of 2013. This would be a decision for the next cabinet, senior finance ministry officials said.

Among measures that can be taken to reduce the subsidy burden, this (diesel) is most doable, a finance ministry official told FE. The official also said that the reduction of fuel subsidies would be easier to do than fertiliser or food subsidies, as food was a rights-based issue and increasing urea prices would also require deft political handling.

On gold imports, the North Block is of the view that the current account deficit will now provide room for increased gold imports, which will lead to reduced smuggling.

We will present a view that quantitative and tariff restrictions over a long time are unsustainable. There is a case to ease them gradually as the rupee has stabilised and we have enough forex to cushion against trade deficit shocks, if any, a second finance ministry official said. The person added that changes will be suggested to ease the duties as well as the 80:20 scheme, as per which the nominated agencies which import gold are required to re-export 20% of the gold they bought.

...We cannot change duties and restrictions on gold imports as and when the situation demands. there should be a long-term strategy in place as well, Care Ratings chief economist Madan Sabnavis said.