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Wednesday , February 19 , 2014
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Diesel decontrol nears reality

Mumbai, Feb. 18: Diesel will retail at market rates early next fiscal even if the government fails to bite the bullet and eliminate all subsidies on the fuel that powers India’s transportation sector.

“It is expected that the gap between administered price and market price of diesel would be eliminated by early FY 2014-15,” the UPA government said in its fiscal policy strategy statement, a little read document that accompanies the budget papers.

The government has already taken an in-principle decision to eliminate all subsidies on diesel. The subsidy on petrol had been scrapped in June 2010.

But the government didn’t have the will to pull the trigger and implement the unpopular decision ahead of a crucial general election as that would ignite a powder keg of resentment that has steadily been building up over the UPA’s 10-year long reign, punctuated by frequent revelations about corruption in high places and a prolonged period of policy paralysis.

A committee headed by Vijay Kelkar, former petroleum secretary and chairman of the Thirteenth Finance Commission, which had been asked to outline a fiscal roadmap for fiscal consolidation, had suggested in its September 2012 report that half of the diesel subsidy ought to be eliminated by March 31, 2013. It added that the remainder could be scrapped by the end of March 2014.

“Similarly, our policy goal should be to eliminate the LPG subsidy by 2014-15 by reducing it by 25 per cent this year (2012), with the remaining 75 per cent reduction over the next 2 years. For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15,” the Kelkar committee had said.

The fiscal policy strategy statement for 2014-15 says the difference between the administered prices and market prices of diesel had “narrowed substantially” in the beginning of the second quarter of 2013-14.

But a sharp depreciation of the rupee in early August “widened the gap between the administered prices and market prices”.

With the stabilisation of external exchange rates and stable international crude oil prices since then, the gap between the administered price and the market rate of diesel will be eliminated, the statement added. “Thereafter, both petrol and diesel would be deregulated and linked to market prices, leaving only a PDS Kerosene and LPG subsidy,” it added.

The new government will certainly hope that a combination of falling crude prices and stable exchange rates will eliminate the need to actually announce the deregulation of diesel prices.

Finance minister P. Chidambaram is leaving his successor with very little elbow room in managing fuel subsidies after rolling over to the next year Rs 35,000 crore that ought to have been paid out in the fourth quarter of this fiscal. The rollover last year was higher at Rs 45,000 crore. But the new government is certain to squeal about this sleight of hand even though it’s a ploy that has been used before.

The interim budget has provided for an overall fuel subsidy of Rs 63,427 crore in 2014-15. But if the Rs 35,000 crore overhang in fuel subsidies from this fiscal has to be paid out from that kitty, the new government will have just Rs 28,427 crore to play around with in the full year unless it can rustle up more money from somewhere.

The growth in gross tax realisations has already been overestimated at Rs 13,79,199 crore a whopping 19 per cent growth over the revised estimates of Rs 11,58,906 crore in 2013-14. And that means it can only come out of fresh borrowings, which would constrain fiscal consolidation goals.

So, the new government will hope that the UPA’s forecast of a market-determined deregulation of diesel prices will play out — leaving it with the burden of having to pay subsidies on only LPG cylinders and kerosene.

The under-recovery in kerosene and LPG accounted for about 43 per cent of the total under-recoveries of Rs 1,61,029 crore in 2012-13 and just over 52 per cent of the Rs 1,00,632 crore in the first nine months of this fiscal.

But on Monday, the petroleum planning and analysis cell under the petroleum ministry reported that the under-recovery in diesel — the gap between the production cost and retail price — had actually widened to Rs 8.31 per litre from Rs 7.39 earlier.

Fuel subsidies paid out by the government paper over a big chunk of the under-recovery in fuel prices that state-owned refiners must suffer for selling diesel below the cost of production.

The under-recovery in diesel in the first nine months of this year ended December 31 has been estimated at Rs 47,655 crore against Rs 92,061 crore in the full year of 2012-13.

The price of the Indian crude basket also rose to $106.40 per barrel from $106.06 per barrel in the previous fortnight.

International crude oil prices have stubbornly stayed above $100 a barrel even after the international community lifted all the sanctions on Iraq and permitted it to return to full production.

Last December, the Organisation of Petroleum Exporting Countries (Opec) agreed to renew for six months its 30 million barrels per day output cap for the first half of the year to keep prices above $100 a barrel.