The finance ministry wants to keep its subsidy bill to less than 2% of GDP so that is able to check fiscal deficit that is expected to be around 5.3% this year and projected at 4.8% in 2013-14.
At current global oil prices, under recovery on diesel will become nil in the next 22 months. The under recovery on diesel at present is Rs 10.27/litre. Ever since the announcement of 45-50 paise increase in diesel price per litre every month on January 17, the product price has been adjusted twice.
“Apart from volatility in global oil prices, next year’s general elections and elections in several states this year could also interrupt regular hikes in diesel prices. This has been understood well in government circles and therefore the move to cap subsidy,” said an oil ministry official.
Of the 2012-13 fuel subsidy outlay of Rs 43,600 crore, Rs 38,500 crore was used for payment of 2011-12 dues and Rs 55,000 crore was subsequently sanctioned, which means a deferral of Rs 40,000 crore to 2013-14.
In its attempt to reduce oil subsidy, the Centre has already capped the sale of subsidised domestic cooking gas cylinders to households at nine per year. Petrol prices are already de-regulated and OMCs have the freedom to revise its prices according to global prices. Diesel and kerosene have so far not been touched but the government now wants to restrict its commitment only to kerosene. The Kelkar report on fiscal consolidation has advocated a phase-wise reduction of subsidy even for kerosene and transferring the benefit directly of beneficiary through cash payments.
Analysts said the liquidity position of OMCs is expected to improve over the medium term, resulting in reduced under-recoveries and lower debt levels. They reckon that the proposed gradual increases in diesel prices would help correct the disparity between prices of diesel and alternative fuels like CNG and PNG, benefiting city gas distribution players.
It is likely that the government would let upstream oil companies ONGC, Oil India and GAIL cut their share of the subsidy burden corresponding to, if not more than, the overall decrease in the oil subsidy burden. The