FM prepares ground for bold moves
Says reining in subsidies would require broad consensus among political parties

BS Reporter / New Delhi Mar 25, 2012

A day after Petroleum Minister Jaipal Reddy assured oil marketing companies (OMCs) of taking up the issue of raising fuel prices with the empowered group of ministers (EGoM) concerned, Finance Minister Pranab Mukherjee said reining in subsidies would require taking tough decisions in the coming months.
Interacting with members of the Federation of Indian Chambers of Commerce and Industry, Mukherjee, also the EGoM’s chairman, said Budget was not the only exercise through which all work was to be done. “In meeting the targets under the road map (of fiscal deficit), I am conscious of the fact that the government would need to take and implement some difficult decisions in the coming months,” he said.
“Many of the decisions which we shall have to take shortly require a broad consensus among the wide range of political parties and all other stakeholders,” Mukherjee said.
OMCs are demanding prices of petrol, diesel, liquefied petroleum gas (LPG) and kerosene be raised. They are losing Rs.13.10 a litre on diesel, Rs.28.67 a litre on kerosene and Rs.439 per 14.2-kg domestic LPG cylinder. OMCs don’t get compensation for selling subsidised petrol. But now, they are demanding Rs.4,500 crore in compensation to meet losses.
Reddy had said he could not take the decision (on raising prices) alone and would raise the issue at the EGoM. As of now, there is no meeting scheduled for EGoM.
Petrol was officially decontrolled in June 2010, but it soon became politically unviable to allow a price hike, with a host of state Assembly elections lined up. Despite being decontrolled, petrol’s price has not been revised in line with the market price since November. Diesel and LPG prices were last raised in June 2011 and kerosene prices in June 2010.
Earlier when asked whether the Budget move not to increase the excise duty on diesel cars might be interpreted as taking oil reform measures outside the Budget, Mukherjee had said Prime Minister Manmohan Singh would hold discussions with all political parties and state governments to build a consensus on the issue.
Yesterday, Reddy had said the government was not contemplating decontrol of diesel prices. The government has agreed in-principle to decontrol diesel prices, but the decision is yet to be executed. The Economic Survey for 2011-12 suggested a fixed subsidy for every litre of diesel sold as an interim measure before the fuel price was decontrolled.
Mukherjee assured the industry once again that the government was committed to meeting fiscal deficit, expenditure and subsidy targets fixed in the Budget.
However, critics pointed out subsidies were not adequate, given the behaviour of oil prices in international markets. The government had earmarked Rs.23,640 crore as petroleum subsidy for 2011-12, but it was scaled up to Rs.68,481 crore in the revised estimates. For 2012-13, the government has kept a provision of Rs.43,580 crore as oil subsidy.
For 2011-12, the Budget had assumed crude oil prices for the Indian basket to be $90 a barrel, but it was revised to $115 in this Budget. For 2012-13, the government has assumed the price to be $120 a barrel. Global crude oil prices for the Indian basket rule at over $122 a barrel.
Fiscal deficit is estimated to shoot up to 5.9 per cent of gross domestic product this financial year, from 4.7 per cent in Budget estimates. The government has set a fiscal deficit target of 5.1 per cent for next financial year.
“2011-12 saw distortion in our fiscal balance, with expenditure slippage on account of higher subsidy and growth slowdown affecting tax revenue collections. Going forward, a critical element of the strategy is to implement ambitious, but at the same time, realistic fiscal consolidation road map,” the finance minister said. The strategy involves expenditure management through a cap on subsidies at two per cent of GDP for 2012-13 and gradually taking it to 1.75 per cent over three years. Besides, the Budget was focused on additional resource mobilisation of Rs.41,400 crore, he added.