Diesel price hike will lower fiscal deficit by only 0.2%, says finmin

The steep hike in diesel price and the rationing of subsidised LPG cylinders will lower the central government’s fiscal deficit for this financial year only by 0.2%, finance ministry said.

The fiscal deficit for 2012-13 is estimated at R5.14 lakh crore or 5.1% of the GDP.

The R5 a litre increase in diesel price and the reduction in LPG subsidy will lower the revenue losses of oil companies by R20,300 crore but the impact on the exchequer is minimal considering the huge oil subsidy outgo owing to the persistently high crude oil price.

The government bears more than three-fifth of the losses incurred by retailers IOC, HPCL and BPCL.

The remaining is compensated by upstream energy companies ONGC, Oil India and Gail India.

The deficit has already reached 55.4% of the budgeted target in just first four months of the fiscal on account of steeper subsidies for fuel, fertilizer and food.

The government had budgeted for a fuel subsidy of R43,000 crore, most of which has already been exhausted.

The R5 a litre increase in diesel price announced on Thursday comprises a R1.50/litre increase in excise duty and a price increase of R3.50 per litre. This will reduce the under-recovery of fuel retailers by R15,000 crore. The government has also decided to cap LPG cylinders to 6 per family beyond which consumers will have to pay market price.

While kerosene and petrol prices were left unchanged, the cabinet decided to off-set R6 per litre under-recovery on petrol by reducing the excise duty on petrol by R 5.30 per litre.

The duty forgone on petrol is calculated to be around R6,800 crore, which will lower the state’s gain from the increase in excise duty on diesel. Government sources said that the original proposal was to increase fuel prices across the board and cap the subsidised LPG cylinders to 4 per family.

Those measures had the potential to significantly cut the revenue losses of oil companies by R46,000 crore translating to a 0.5% cut in fiscal deficit.

But they did not receive political consensus. The total under-recovery of oil companies now stands at R1,67,000 crore which is more than the under-recovery of R1,38,571 crore incurred by them during 2011-12.