Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Gradual Hike in Diesel Prices, LPG Subsidy to 9 Cylinders a Year


The government has changed the structure of the oil subsidy. To reduce the diesel subsidy (the biggest of the lot) oil companies are being allowed to raise diesel prices by a small amount every month – the first hike of 45 paise per liter (about 1%) kicks in today.

Bulk consumers (Railways, defence etc.) will see a massive increase of Rs. 11 per liter (nearly 25%). This accounts for 40% of all diesel consumption in the country so this move will lower the subsidy bill substantially. I had made this graph when the government has increased diesel prices by Rs. 5 per liter:


If you consider that 40% of the subsidies on diesel go away, you might see about Rs. 30,000 cr. (about 0.3% of GDP) shaved off the deficit. But the impact is lesser if you consider there are only three months remaining in this financial year.

LPG subsidy, though, is set to increase. Retail consumers, who were earlier limited to 6 cylinders per year (3 for October to March) will now get 9 a year. The impact for the remaining part of FY 13 hasn’t been revealed yet. This might increase the subsidy bill somewhat, but I I believe the impact will be less than Rs. 3,000 cr. per year.

The LPG subsidy increase works for me. We use a 16 kg cylinder every 1.5 months, for a family of four. The 9 cylinder limit should easily cover us, and honestly we don’t even need the subsidy. Think about it – a subsidy of Rs. 400 per cylinder over 1.5 months is about Rs. 275 per month, which won’t move the needle very much. However, I’ll take the Rs. 275 and put it into the children’s fund – inflation in that department is much higher!

As diesel prices go up month on month, people may not notice enough to protest hugely, for now. But in a few months they will be furious. Everyone will start increasing prices assuming an increase every month; from veggies to maintenance bills to diesel generator charges, everything will go up constantly. This will, in a few months, make people extremely unhappy and then you’re coming to an election in 2014. Which is why I doubt the government will allow a raise in subsequent months (although this is their intention).

While the attempt to reduce the subsidy is good, and diesel prices should be deregulated, this gradual price rise is just a temporary step and can easily be reversed. We need a strategic policy decision, not an acceptable tactic. Given the number of changes the government has done to ad-hoc decisions like this, I do not believe that this measure will not be changed in the near future. Also I am thankful they didn’t resort to myopic measures like increasing one-time tax on diesel cars; a pump price hike is far more effective. Now to see if we will actually reduce consumption.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial