New Delhi, Jan. 17: Periodic diesel price rises should help the government to keep in check its oil subsidy bill and the ballooning fiscal deficit.
"There is the inevitability of upward price adjustment in diesel prices considering the huge subsidy burden and the need to maintain the fiscal deficit to GDP (gross domestic product) ratio at 5.3 per cent. The magnitude and the timing will be worked out between the government and the OMCs (oil marketing companies)," Shubhada Rao, Yes Bank economist, said.
However, finance minister P. Chidambaram said, "I am not factoring that (impact of price hike on oil subsidy) at the moment. I am proceeding with the basis that the subsidy bill remains the same. When and how they (oil companies) will make small corrections, I can't say."
Hours later, Indian Oil said it had raised diesel prices by 45 paise per litre and cut petrol prices by 25 paise.
The fuel subsidy for selling diesel, kerosene and domestic LPG cylinder at government rates is expected to be over Rs 167,000 crore this fiscal compared with Rs 138,541 crore in 2011-12.
The oil subsidy outlay after the first supplementary demands for grants has already touched Rs 72,260 crore.
The petroleum ministry has asked the finance ministry to pay Rs 1 lakh crore, while upstream oil companies such as ONGC, Oil India and the OMCs would share the rest of the burden.
"Even a one rupee hike in diesel will lead to a Rs 8,000 crore reduction in subsidy. So, even a Rs 10 hike over a period of time can have a significant impact on the fiscal deficit. However, it seems difficult to implement given that the government will face general elections in a year-and-half," Gautam Singh, economist with Anand Rathi Securities, said in a research report.
State-owned oil companies now sell diesel at a loss of Rs 9.60 per litre, kerosene at Rs 30.64 a litre and LPG at Rs 490.50 per 14.2-kg cylinder.
Under-recoveries in the nine months are Rs 124,854 crore. The subsidy on diesel is Rs 73,815 crore, while LPG subsidy is Rs 29,148 crore.
The finance ministry has so far given Rs 30,000 crore towards oil subsidy this year.
The oil ministry is asking for the balance Rs 70,000 crore, but the finance ministry is unable to do so as it is trying to restrict the fiscal deficit to 5.3 per cent of GDP.
The Kelkar committee has recommended that the government cut subsidies on food, fuel and fertiliser to narrow down its fiscal deficit. The committee warned that India was on the edge of a "fiscal precipice" and if measures were not taken soon, it would have a major impact on the Indian economy.
It had recommended cutting by half the subsidy on diesel by the end of this fiscal and the rest by the end of the next year.
The report said that the current deficit level of 5.1 per cent could balloon to 6.1 per cent if no measures were taken.
The government had planned to borrow Rs 5.7 lakh crore to finance the 5.1 per cent deficit. A higher fiscal deficit of 5.3 per cent translates into an additional market borrowing of Rs 20,000 crore.
The fiscal deficit has worsened on account of lower tax realisation and a poor response to the divestment programme.