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Diesel Up By Rs. 5; Subsidized LPG Usage Limits Introduced

Fuel Prices have been hiked, in an attempt by the government to curb the deficit somewhat. Remember, crude is at over $113 per barrel (Brent, which is more indicative of what we use) which is quite high and with the rupee at 55 versus Rs. 45 when it was that much the last time, the price hurts. With the recently announced QE3, the price of oil is likely to go up even more.

The salient points.

  • Diesel prices are up by Rs. 5 per litre. Of this, Rs. 1.5 is an increase in Excise duty (which was very low earlier) and the balance will flow to the oil marketing companies. This will cut the under-recovery in diesel by about 15%, giving 15,000 crores to the OMCs, but the deficit for diesel is likely to remain at above 100,000 cr. for the year. Diesel will cost Rs. 47 in Delhi and a little bit higher in the rest of the country (upto Rs. 52 I suppose).
  • No increase in petrol prices. What has been done is to reduce the excise duty of around Rs. 14 per liter currently to around Rs. 9 per liter (a drop of Rs. 5.3). This won’t change anything for petrol users but it will put Rs. 5.3 in the coffers of oil marketing companies for every liter sold.
  • Each consumer will get only 6 subsidized LPG cylinders per year. This measure will only cut the LPG subsidy by 15%, even though 44% of all consumers use less than 6 cylinders a year. (Can you imagine the abuse at the hands of the rest?) The remaining part of this year – till March 31, 2013 will mean only 3 cylinders per consumer at subsidized rates. Above that limit, we have to pay market rates, while will change every month. I don’t expect it to be higher than the private market prices of about Rs. 850 per cylinder of 14 kg.  (Subsidized rates are Rs. 430 or so)
  • No changes in Kerosene prices, where OMCs will continue to lose money (over 32,000 cr.).

Last year, the total under-recovery was 138,541 cr. of which the government bore 83,500 cr. of it (as cash given to the OMCs in lieu).

This year, the total under-recovery will, even after this move, increase the total under-recovery to 167,000 cr. In the same proportion, the government will need to shoulder about Rs. 100,000 cr. (1 trillion). That is about 1% of GDP.


How This Impacts The Fiscal Deficit

In effect, the whole measure reduces the government share of the under-recovery by Rs. 12,000 crore (about 60% of the Rs. 20,300 cr. saved).

But the government will now get lesser revenue. For each litre of petrol sold, the government will get Rs. 5.3 less. (about 35% less) For each litre of diesel sold, the government gets Rs. 1.5 MORE, compared to the Rs. 2.06 charged (which is about 75% more).

The government earned approximately Rs. 26,000 cr. from petrol in and Rs. 30,000 cr. from diesel 2010-11. (source) With the above figures the petrol duties are cut 35% (loss of 9,100 cr.) but the diesel duties go up 75% (which is a gain of Rs. 22,500 cr.). The net impact is Rs. 13,400 cr. (approximately).

So the government will benefit by:

Lower Underrecovery cost: Rs. 12,000 cr.

Higher duty: Rs. 13,400 cr.

Total: Rs. 25,400 cr.

This is about 0.25% of GDP, and 1/20th of the total fiscal deficit which is expected to be more than 550,000 cr. While it is a good measure, it needs to be followed up by more efforts such as reducing corporate tax cuts, reducing government expenditure and rationalizing taxes.

Other Impacts

I wouldn’t complain about the LPG thing. I probably use about 14 kg per month nowadays, in a household of four/four – the non-subsidized "hike", to me, is Rs. 400 a month. This is less than a pizza, so let me not quibble. But the impact will be felt by those that use subsidized gas for large families, and for whom the Rs. 400 a month is a huge amount. (Kerosene Gas Stoves, here we come?)

It will impact some restaurants that have shadily been using subsidized gas. And autorickshaws or cars that use LPG cylinders.

The rise in diesel prices will mean a price rise in food items (transported by diesel powered trucks mostly) and a rise in transportation costs. This will hurt growth as consumers cut consumption, but that is effectively the only way to bring inflation under control. Effectively we will see higher prices before we see lower growth and eventually, lower prices.

The deficit impact isn’t that much, but it will be in better shaper than earlier, and at least some effort is being made.

The price difference between diesel (now Rs. 47) and petrol (Rs. 67) is still high, so while there will be some impact on diesel car sales, they will still sell higher than petrol variants.

Overall, a long awaited move, and in the right direction. However, it could just be a ploy to deflect attention from other scams. Or to avoid a downgrade to junk rating (which will not impact the government but hurt private corporate borrowing). Or, it might just be a larger announcement before the Great MB of Kolkata forces them to cut the hike to Rs. 2 or something. You never know, and all the above analysis must be taken with pinches of political salt.

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