P. Chidambaram with petroleum minister S. Jaipal Reddy (left) and minister of state R.P.N. Singh in New Delhi on Wednesday. (PTI)
New Delhi, Oct. 17: The possibility of a fuel price review has risen with finance minister P. Chidambaram pitching for correcting the gap between the prices and the higher costs that is being met by subsidies, which in turn, is threatening to push the fiscal deficit to unsustainable levels.
“With less than adequate pass-through, subsidies of these products (diesel, kerosene and LPG) have burgeoned. The problem is that these are clearly not sustainable and we must devise ways and means of correcting the price distortions,” Chidambaram said at an oil conference here today.
The government had budgeted oil subsidy, given to state-run oil marketing firms Indian Oil Corporation, BPCL and HPCL for selling diesel, domestic LPG and kerosene below cost, at Rs 43,580 crore in 2012-13.
He said as the “under-recoveries of the oil marketing companies mounted to unsustainable levels in the current fiscal, the government had no option and was forced to raise diesel prices by Rs 5 a litre and limit subsidies on LPG cylinders to 6 per connection per year”.
Chidambaram said the current pricing system was not conducive to economic decision making.
The Kelkar panel wanted the government to eliminate half of the per unit subsidy on diesel during this fiscal and the remaining half over the next fiscal. It recommended eliminating the LPG subsidy by 2014-15, reducing it by 25 per cent this year and the remaining 75 per cent in the next two financial years.
“For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15,” it said.
The finance minister said, “Related prices between alternative fuels (petrol and diesel) are distorted. It results in inefficient substitution of one fuel with the other.”
The minister said as India imported about 75 per cent of its crude oil requirement, the current account deficit has widened and the rising subsidy bill has increased the government’s fiscal deficit.
He said India’s macro economic outcome in 2008-09 (the year of the global financial crisis) and 2011-12 (which witnessed the Eurozone crisis) was significantly affected by the rise in the global prices of crude oil.
“A tighter product market, rising prices and a growing demand could slow and indeed have slowed economic growth and have serious implications on the welfare of citizens and consequently a major challenge for policy makers,” Chidambaram said.
“The single most fiscal risk not only to India but to all developing countries is the burgeoning subsidy bill. While some provision has been made under oil subsidy year after year, we have found that the provision is always way off the mark as oil prices are globally determined,” he said.
Subsidies are likely to exceed the budget estimate of 1.9 per cent of GDP by a significant margin, and the government is looking at other ways (curbing other expenditure and maximising revenue collections) to keep its fiscal deficit close to the target of 5.1 per cent of GDP. The finance minister has already admitted subsidies would be 2.4 per cent of GDP.