Getting oil psus back on track

May 24 2014, 05:06 IST
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SummaryThis is the last in the series of low-hanging fruit — steps the government can take to revive the economy

Narendra Modi’s plan to bolster PSUs by professionalising them must also involve addressing some key policy questions. Carrying on with the monthly diesel price hike of 50 paise could eliminate the R62,000 crore subsidy in another 9-10 months— as has been the case so far, the gradual nature of the hike will ensure there is little consumer backlash. And hiking LPG prices by a mere R100 would still leave a R350 subsidy per cylinder while cutting the under-recovery bill by over R10,000 crore. Targeting subsidies to just the poor, or using Aadhaar-based DBT to eliminate over 2 crore duplicate accounts would help even more. Doing this would reduce diesel under-recoveries by R36,000 crore—half the FY14 total has been taken since the subsidy will be reduced over almost all of FY15. Given that upstream oil firms pay for around half the under-recoveries, this means around R23,000 crore will be added to their bottom line thanks to the moves on diesel and limited ones on LPG, or R16,000 crore after deducting a 30% tax. Assuming even a modest PE of 10, that means the market cap of oil PSUs will rise by R1.6 lakh crore.

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