Petroleum price reform at the heart of both
That the government plans to announce its austerity measures after the current session of Parliament comes to a close says volumes for the leeway it thinks it has in carrying out even basic daily governance, but leave that be since the current session comes to an end in the middle of the week. Once Parliament closes, oil price reforms have to be top of the agenda since under-recoveries have ballooned from R1,38,000 crore in FY12 to a likely R1,90,000 crore in FY13 based on today’s crude oil prices and the current exchange rates—they’ve reached R16.34 per litre of diesel, R31.49 on kerosene and R480.5 per cylinder of LPG. Not only do the high subsidies—very little of which really goes to the aam aadmi, given the leakages kerosene PDS supplies—play havoc with the fiscal deficit, they add to the current account deficit since hugely subsidised fuel supplies ensure there is no incentive to reduce consumption. Indeed, thanks to the huge subsidy on diesel, factories burn the more expensive diesel in place of furnace oil since, post-subsidy, diesel is the cheaper fuel.
To that extent, allowing oil PSUs to hike prices of petrol (which, technically, is not even regulated!) and diesel will not only reduce the pressure on the fiscal deficit, it will also send out a signal that, though weak, the government’s commitment to economic reforms is not completely dead. Apart from anything else, this needs to be done to ensure the oil PSUs are able to maintain supply levels. Right now, of the R1,38,000 crore of fuel under-recoveries in FY12, the government has only given R45,000 crore and around half of this pertains to the last quarter of FY11. Which is why the oil PSUs have put in an urgent request for another R49,000 crore for FY12. If this is not available, petrol/diesel supplies will be affected, though as in the past, all attempts will be made to ensure supplies to the capital are maintained—another reason for the political class to not know what’s happening!