Cabinet May Take Up Oil Price Hike May 27

The government is likely to propose a 15 per cent hike in petroleum prices and a schedule to dismantle the administered price mechanism to the cabinet when it meets next week.

Sources in government said the cabinet meeting was tentatively scheduled for Tuesday, though the date would be finalised only after the outcome of the steering committees meeting on Sunday. Prime Minister I K Gujral is expected to present the urgency for the price increases to the steering committee.

The committee is also likely to discuss the finance ministrys recent paper on subsidies.

Senior officers say the government expects resistance to hikes in the prices of petroleum products from sections of the Front at Sundays meeting but is determined to increase prices to the extent that at least Rs 5,000-6,000 crore can be brought in during this financial year. That would at least prevent refineries, which are having difficulty raising external commercial borrowings, from having to close down. The oil pool deficit, which has ballooned to about Rs 1,700 crore, would remain at that level but would not increase any further if this level of price increase is effected. If allowed to go unchecked, the deficit would reach Rs 24,000 crore by the end of this financial year.

 

The current thinking in government is that the present macro-economic outlook with inflation below six per cent, makes it possible to go ahead with the price hike. Top government officials estimate that a 15 per cent hike in prices would push up the annual rate of inflation, measured by the wholesale price index, by 1.50-0.75 per cent.

In the run-up to the meeting, while the petroleum ministry has found an ally in the Left parties, the finance ministry viewpoint arguing for a long-term solution to the problems posed by the present administered price mechanism of petroleum products has now found favour with some other ministries, including the Planning Commission.

Clearly, the casting vote will be that of the Prime Minister. Sources reveal that Gujral had, at a meeting convened after his return from Male, favoured the finance ministry approach to tackle the problem of the burgeoning oil pool deficit.

The finance ministry has opposed the petroleum ministry proposal to cut customs and excise levies as it entails a Rs 6,000 crore loss in revenue. With the food subsidy bill slated to be higher than the targeted sum, the ministry is already under pressure to meet its fiscal deficit target of 4.5 per cent of gross domestic product in a year when there has been a record slashing of direct tax rates.

Instead, the proposal current favoured in government is:

Phase out of subsidy on diesel and an immediate 15 per cent hike in prices;

Phase out of LPG subsidy and an immediate hike in prices by 15 per cent;

Shift kerosene subsidy to the general budget in a five-year time schedule; and an immediate hike in prices by 20 per cent.