Phased decontrol of diesel prices and capping of subsidised liquefied petroleum gas (LPG or cooking gas) cylinders are likely to reduce the petroleum subsidy by a little over 40 per cent in 2013-14.
The two measures were politically risky but the cut of approximately Rs 60,000 crore (Rs 600 billion) will be handy for a government burdened by a high fiscal deficit.
Though the government had budgeted only Rs 40,000 crore (Rs 400 billion) in petroleum subsidy in 2012-13, gross subsidy for the sector is estimated to be Rs 155,000 crore (Rs 1,550 billion).
Of this, Rs 95,000 crore (Rs 950 billion) might have to be borne by the government.
For 2011-12, it paid Rs 68,481 crore (Rs 684.81 billion) as subsidy to its three oil marketing companies.
The cut is calculated at the current level of product prices and rupee value.
Capping of subsidised LPG cylinders would cut the subsidy by Rs 7,950 crore (Rs 79.5 billion) on an annualised basis, said an official. In the case of diesel, the government has asked the OMCs to raise prices at retail outlets by half a rupee every month and charge the market price for bulk buyers.
“A reduction in subsidy is the best way to increase prices,” said B Mukherjee, director (finance), Hindustan Petroleum Corporation. As a result, the revenue loss on diesel would decrease by Rs 15,000 crore (Rs 150 billion) for the three OMCs, said an Indian Oil Corporation official.
Even after the second dose of decontrol on February 15, the revenue loss on diesel stood at Rs 10.27 a litre.
On a subsidised LPG cylinder, it is Rs 481. For kerosene sold through ration shops, it is Rs 31.60 a litre.
As the quantity of increase required over a period of time depends on the revenue loss determined through a fortnightly mechanism, the oil companies are not sure of the exact impact of LPG and diesel price changes.
The government might also want to fix the subsidy on a litre of diesel, as was proposed last year by Kaushik Basu, then chief economic advisor in the finance ministry.
Government companies which bear part of the subsidy burden do not want the entire benefit of subsidy reduction to just spruce the government balance sheet. “If there is a cap in subsidy (for diesel), the reduction should factor in the contribution of upstream companies.
If we are paying Rs 60,000 crore (Rs 600 billion) of the subsidy of about Rs 155,000 crore or Rs 1,550 billion (2012-13 estimate), that ratio should be maintained, if there is a subsidy cap,” said Sudhir Vasudeva, chairman and managing director, Oil and Natural Gas Corporation.
It, Oil India and GAIL India shared the Rs 60,000-crore (Rs 600-billion) subsidy burden on the oil marketing companies.
From April to December, the under-recovery from diesel has decreased to Rs 73,815 crore (Rs 738.15 billion), against Rs 81,192 crore (Rs 811.92 billion) during the same period last year.
On kerosene, it has dropped to Rs 21,891 crore (Rs 218.91 billion) during the period, against Rs 27,352 crore (Rs 273.52 billion) during the April to December period in 2011-12. Domestic LPG also saw a minor decline in this regard to Rs 29,148 crore (Rs 291.48 billion), as against Rs 29,997 crore (Rs 299.97 billion) during the same period last financial year.