In order to reduce the impact of fuel subsidy on government’s fiscal deficit, the petroleum ministry proposed a gradual rise in diesel prices, by 1 per litre every month over a 10-month period.
It is expected that the gradual rise may avoid controversy engendered by steep hikes in infrequent revisions. It may be noted that diesel amounts to 60 percent of under-recoveries.
Further, the government plans to raise kerosene prices, albeit at a slow pace. The ministry’s timetable for a rise in kerosene prices is 10 per litre over a two-year period.
Government is compelled to reduce its fiscal deficit on the back of the possibility of a downgrade by global rating agencies. The government has no option but to bring down subsidies to meet milestones promised in its fiscal consolidation road map. The government plans to cut fiscal deficit to 4.8 percent of GDP for the year ending March 31, 2014, from 5.3 percent of GDP this fiscal.
Another proposal mooted by the oil ministry is fixing a per litre subsidy on diesel to bring predictability in expenditure. A per litre subsidy on diesel will imply that oil marketing companies (OMCs) will not be reimbursed on an ad hoc basis for the losses that they incur. Instead a compensation of fixed amount on a per litre basis would be given. The relatively fixed subsidy burden can be brought down in case global crude oil prices decline.