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Economy Sep 14, 2012

Why the diesel hike will not even dent the fiscal deficit

By Vivek Kaul

The Congress-led United Progressive Alliance (UPA) has the habit of shooting messengers who come in with bad news. So here is some more bad news.

Almost half way through the financial year 2012-2013, the fiscal deficit of the government is looking awful to say the least. Fiscal deficit is the difference between what the government earns and what it spends. The chances are this year it could be nearly as bad as it was in 1991, when the country was close to external bankruptcy.

The main villain of the piece is subsidies. Especially, subsidies for oil-diesel, kerosene, cooking gas-which will eat up nearly Rs 2,00,000 crore, not to speak of subsidies in fertiliser and food.

When the finance minister presented his budget in March, he made many assumptions that now look like fantasy. Reuters

But before you jump in and inform us that, hey, the government just raised diesel prices by Rs 5 a litre, and introduced dual pricing for cooking gas (families will get six cylinders at subsidised rates, and the rest at market rates), so won't the deficit come down?

It will, but the subsidy cut is a fleabite on a elephantine deficit.Fixing the hole in the budget will take a lot more effort than just one diesel hike. For the record, even after the diesel hike and the limits placed on subsidised cylinders, the oil subsidy bill will come down by just around 10 percent-from nearly Rs 2,00,000 crore to Rs 1,80,000 crore. Or thereabouts.

So let's take a close look at the numbers. When the finance minister presented his budget in March, he made many assumptions that now look like fantasy. The overall fiscal deficit-the gap between expenditures and revenues -was projected to be Rs 5,13,590 crore. The expenditure of the government for 2012-13 was expected to be Rs 14,90,925 crore. In comparison, the government expected to earn only Rs 9,77,335 crore during the course of the year.

The difference between the earnings and expenditure is Rs 5,13,590 crore, and this is the projected fiscal deficit. Put another way, the government had planned to spend 55 percent (Rs 5,13,590 crore expressed as a percentage of Rs 9,77,335 crore) more than it earned.

The expenditure part of the calculation includes subsidies on oil, fertiliser and food. The subsidy on oil was assumed to be at Rs 43,580 crore. This subsidy was to be used by the government to compensate oil marketing companies (OMCs) like Indian Oil, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and cooking gas, at a loss.

The government has more or less run out of the budgeted oil subsidies. It has already paid Rs 38,500 crore to OMCs for selling diesel, kerosene and LPG at a loss during the last financial year. It's like using this month's salary to pay last month's bills. This amount was reimbursed only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for this year. This leaves only around Rs 5,080 crore with the government for compensating the OMCs for the losses this year.

That's just loose change in comparison to the losses the OMCs are expected to face for selling diesel, kerosene and LPG. Oil Minister Jaipal Reddy recently said that if the current situation continues the OMCs will end up with losses amounting to Rs 2,00,000 crore during the course of the year.

As economist Shankar Acharya wrote in Business Standard on 13 September, "The real fiscal spoilsport is, of course, subsidies, especially those for diesel, LPG and kerosene, though those on fertiliser and foodgrain are also large. Data circulated by the petroleum ministry indicate under-recoveries by oil marketing companies (OMCs) of Rs 17/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG."

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by Vivek Kaul

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