Following the short-term decision to cut petrol and diesel prices last November, there is now the decision to leave LPG and kerosene prices unchanged as part of the UPA governments commitment to the so-called aam admi. There are no prizes for guessing that this has more to do with pandering to vote banks ahead of the forthcoming elections in states like Uttar Pradesh and Punjab. As we have consistently argued, what makes for good politics doesnt necessarily make for good economics, as the latest decision only adds to the subsidy bill, the burden of which is either borne by domestic oil majors or the government. The Union petroleum ministry has prepared a cabinet note that not only seeks an extension of the subsidy scheme on LPG and kerosene until 2010 but also wants the Budget to bear the entire subsidy burden, according to reports. If crude oil prices remain at current levels, that burden alone amounts to a whopping Rs 28,600 crore in the Union Budget for 2007-08one that will certainly impact meeting the fiscal deficit reduction targets under the Fiscal Responsibility and Budget Management Act. To keep LPG and kerosene prices unchangedthe price of LPG will have to be raised by Rs 133 a cylinder and kerosene by Rs 14 a litre to bring them on par with costs of productionoverall subsidy burden works out to Rs 67,000 crore in the current fiscal. But the beauty of it, as of now, is that the Budget takes a hit of only Rs 2,930 crore as the government issued oil bonds to domestic oil majors to offset their losses on the sale of LPG and kerosene at administered prices. As none of this entails any cash outgo, it is not reflected in the fiscal deficit.
This state of affairs will, however, change if the Union cabinet accepts the petroleum ministrys proposals that the subsidy burden be extended to 2010 and borne entirely by the Budget, a move that would give us a realistic picture of public finances. The oil-bond issuing sleight of hand has gone on for a little too long. Unfortunately, so long as politics remains in command, there will be no moves to put in place a rational pricing mechanism to tackle the burgeoning subsidy problem, regardless of who bears it. The idea of a dual pricing mechanism for LPG cooking gas so that the affluent dont avail of the subsidy, for instance, may be a worthwhile idea, but such schemes run the risk of fuel diversion from the low-priced bracket to the high-priced one.