Easing subsidy

The fall in international crude prices in the last few weeks gives a good opportunity for India to put its domestic oil price regime in order. Crude price has declined to about $100 from about $115 levels a few weeks ago and this is a multi-month low. The crisis situations in West Asia and Ukraine had pushed up the prices but it is fairly certain now that the trend will no longer be bullish in the near term. The demand for oil from the US has fallen with greater production of shale gas there. Other supply sources have also opened up. The fall in crude prices will positively impact India’s current account and fiscal deficit positions because petroleum subsidies will be lower than expected. This year’s budget has set aside Rs 93,500 crore, including rollovers from the past, for these subsidies.

 
The most important effect of the lower international oil prices is that the subsidy on diesel has come down drastically. The subsidy on a  litre of diesel is under Re 1 now, which is a very small gap. This is because the diesel price has been hiked regularly by 40-50 paise per month from the beginning of last year. The gradual increase has brought down the revenue loss of about Rs 10 per litre last year to a manageable level. What oil marketing companies call under-recoveries on diesel may be completely eliminated in the next few months. So this may be the time to lift the controls on the price of diesel, without hurting the paying capacity and sentiments of the consumers. The government can put a stop to the diesel subsidy regime and link future prices to international price movements. This cannot be done when the price difference is high. The expenditure on diesel is more than that on other petroleum products and so the elimination of its subsidy will make the deficit situation more healthy.

Oil marketing companies now revise petrol prices twice a month. If diesel subsidy ends, petroleum subsidy will remain only for domestic LPG and kerosene. There may be more consumer resistance to deregulation of the prices of these items. But there may be room for some reduction of subsidy. The plans for direct transfer of subsidies to consumers should also be actively pursued so that they reach only those for whom they are intended. The government should not let this opportunity pass.