Fix a per litre diesel subsidy to reduce bill: Survey

Advocating raising fuel price with rise in input cost, the pre-Budget Economic Survey today asked the government to pay a fixed amount per litre as diesel subsidy so as to cut subsidy outgo.

"For diesel, where even the rudimentary first step for freeing prices has not yet occurred, a possible intermediate step is to fix a per litre subsidy from the government," said the survey that sets context for the Budget to be presented by Finance Minister Pranab Mukherjee tomorrow.

"In other words, for every litre of diesel sold by an oil-marketing company, the government will give a fixed subsidy of a certain number of rupees," it said.

The survey advocated shifting the burden of higher international oil prices to consumers to not just limit government's subsidy bill but also curb diesel consumption.

Currently, the finance ministry meets about half of the revenue that state-owned oil firms lose on selling diesel, domestic LPG and kerosene at government-controlled rates. It provided Rs41,000 crore fuel subsidy in 2010-11. This fiscal, the oil firms are projected to lose over Rs137,000 crore in revenue.

"If the price of crude rises, with the subsidy per litre fixed, the consumer's price will rise and so the signal to save on the use of diesel will be transmitted," it said.

The survey said it was possible to make this system more sophisticated by requiring that the per-litre subsidy be raised if the price rises too high, in order to cushion the consumer.

"What is important is that the subsidy should be pre-specified so that, thereafter, government stays fully out of the picture.

State-owned Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp currently sell diesel at a loss of Rs13.55 per litre, kerosene at Rs29.97 a litre and domestic LPG at a loss of Rs439 per 14.2-kg cylinder.

The government had freed petrol in June 2010 but the rates have not moved in tandem with cost. Oil firms currently lose about Rs5 a litre on petrol, which is not compensated by the government because the fuel has been decontrolled.

Stating that pre-fixing the subsidy was not an ideal but an interim measure, the survey said, "since this subsidy is fixed per litre, the government's fiscal burden will not have to take on the full share of the burden created by a rise in the price of crude."

"The only change in burden will be caused by changes in the aggregate consumption of crude, which is a fairly predictable number. Second, the signalling role of price will now be largely intact."

It said prices are signals to consumers and sellers and all those who deal in these products of shortages (or, equivalently, the rising cost of production) and abundance.

"Prices rise when there is a shortage and decline when there is a glut. Once prices are controlled, we effectively cut off these signals," it said.

Citing the example of diesel, the document prepared by the Finance Ministry said, when the international crude price rises, for India, which has to import the bulk of this product, there is, effectively, a shortage.

If prices were left to the market, diesel price would rise in response to this, ordinary people would economise on their use of diesel, and demand would decline, as indeed needs to happen during a shortage.

"In India, this rarely happens, because the signal of shortages and rising cost of inputs in the area of many fuels and energy resources is not permitted to be transmitted to the consumers," it added.