Subsidies a concern, action on diesel prices required

SUBSIDY: Major subsidies extended by the government are likely to jump to Rs 1,34,411 crore during 2011-12

The Survey has warned of deteriorating fiscal health due to a mounting subsidy burden. The huge outgo over the past year has been largely on account of the global rally in crude oil prices, the fertiliser subsidy and state-controlled foodgrain prices, it said. It also blamed ‘coalition politics and federal considerations’ for holding up economic reforms on several fronts.

Major subsidies extended by the government are likely to jump to Rs 1,34,411 crore during 2011-12 as compared to the Rs 1,31,212 crore of 2010-11. The government had projected the subsidy to GDP ratio to remain at 1.5 per cent. It had crossed two per cent in 2008-09 and 2009-10.

These high subsidy levels could take a toll on the government’s intent to lower the fiscal deficit, the survey said. “Besides, higher oil prices entail higher than budgeted subsidy outgo, with attendant implications for the levels of deficit,” it noted. The survey recommends a policy of not tinkering with market prices and on direct cash transfers to keep the subsidy burden under control.

It also advocated a fixed subsidy on every litre of diesel sold, as an interim measure before the fuel price was decontrolled. In recent years, diesel price adjustments have lagged international prices and budgetary subsidies for the fuel have ballooned, it noted. Currently, oil companies incur a revenue loss of Rs 12.17 on every litre of diesel and Rs 439 on every LPG cylinder sold for domestic use. The total subsidy on diesel was Rs 56,732 crore, while on domestic LPG it was Rs 20,516 crore during the first three quarters of this financial year. For every litre of diesel sold by an oil marketing company, the government should give only a fixed subsidy of a certain number of rupees. This would prompt consumers to economise use, the survey stated.

Diesel’s low prices are providing incentives for misuse, apart from resulting in shifts in use such as for luxury sports utility vehicles (SUVs), escalating imports in an energy-insecure country and increased pollution loads. Petrol prices were decontrolled on June 25, 2010 and it was said at the same time that diesel would also be decontrolled but that has not happened. The survey regretted that the price control had prompted private companies like Reliance to exit the fuel retail market.

“Diesel prices need a large adjustment now (as China, for example, has recently undertaken), given subsidies, pollution and public health costs. Charging high road and vehicle taxes is another option (that Singapore uses),” the survey said in a chapter on ‘Sustainable Development and Climate Change’, included in this annual document for the first time.

The survey also stated that the National Food Security Bill might entail some rise in the levels of subsidy, even as it corrects under-consumption by the poor. Among the main items of gross additional expenditure by the government in 2011-12 include Rs 30,000 crore on compensating oil marketing companies for under-recoveries on sale of petroleum products, Rs 13,779 crore for fertiliser subsidy and Rs 2,297 crore as food subsidy.