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Saturday , July 5 , 2014
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Intense debate over fuel fate

New Delhi, July 4: The government is looking at options to cut the oil subsidy bill, such as a one-time hike in kerosene and cooking gas prices or a phased monthly increase like diesel.

“The ministry will put forward different options for the consideration of the government. The call has to be based on economic and political consideration,” a senior oil ministry official said.

One option is to increase the prices of kerosene by Rs 4 a litre and of cooking gas (LPG) by Rs 250 per cylinder, while continuing with the 50-paise-a-month hike in dieselrates.

The other option is to go for monthly increases in LPG price by Rs 5-10 and kerosene by Rs 1 per litre, continuing with the current practice in diesel.

The government has to take a call with an eye on the ongoing civil war in Iraq, the second-largest supplier of crude to India, and its impact on global crude prices and domestic inflation, made worse by a below-normal monsoon.

“As subsidies on diesel have been almost phased out, the focus will shift to reducing subsidies on LPG and kerosene, which accounted for 55 per cent of the total under-recoveries of the oil companies in 2013-14. While the government has ruled out immediate price hikes, it may choose to adopt a similar gradual mechanism to raise LPG and kerosene prices,” Siddhartha Sanyal, economist with Barclays, said.

The under-recovery on LPG is a staggering Rs 449.17 per cylinder; a Rs 5-per-month increase will take seven years to wipe out the subsidy.

Officials said the ministry felt the monthly increases could be as high as Rs 10 if the political leadership took a stand.

The subsidy on kerosene is Rs 33.07 per litre; a hike of Re 1 per month will take more than two-and-a-half years to eliminate the subsidy.

While a hike of Rs 10 per LPG cylinder can cut the subsidy bill by Rs 7,000 crore per annum, the proposed increase in kerosene prices will lower it by another Rs 850 crore each year.

“We expect the Modi government to increase the retail prices of regulated fuel products — kerosene and LPG — to help control its subsidy burden,” said Vikas Halan, Moody’s vice-president and senior credit officer.

“In our view, the government’s most likely approach will be staggered increases, similar to the ongoing hikes in diesel prices every month. This is because while a one-time increase will have a more immediate impact on reducing the burden, it would be more challenging to push through, given the need to control inflation,” he said.

Panel advice

Officials said the oil ministry wanted the Cabinet Committee on Political Affairs to consider the recommendations of an expert panel headed by former Planning Commission member Kirit Parikh.

In October last year, the committee had suggested that diesel prices should be hiked by Rs 5 per litre, kerosene by Rs 4 a litre and LPG by Rs 250 per cylinder immediately to cut the fuel subsidy bill by Rs 72,000 crore.

Endorsing the previous UPA government’s monthly increase in diesel prices, the ministry is likely to propose that the monthly revisions may continue till the present Rs 3.40-a-litre loss on the fuel is fully bridged.

The rise in global crude prices because of tensions in Iraq can potentially throw a spanner in the Narendra Modi-led government’s subsidy rationalisation plans.

With every dollar rise in the price of the Indian basket of crude, the petroleum subsidy rises by around Rs 4,500 crore. Every time the Indian currency depreciates by Re 1 against the dollar, Rs 8,000 crore is added to the fuel subsidy bill.

“We expect the government to rein in subsidy expenditure by keeping it unchanged. It will stick to the interim budget target of Rs 115,000 crore for food subsidy. Besides, persisting on regular administrative pass-through of fuel prices will partially offset the risk from higher crude oil prices,” Shubhada Rao, chief economist of Yes Bank, said.

According to the interim budget, subsidy on food, petroleum and fertilisers is estimated at Rs 246,397 crore for 2014-15 fiscal against Rs 245,452 crore in the revised estimates for fiscal 2013-14.