Crude Compromise PDF Print E-mail
Monday, 27 June 2011 00:00
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For close to a year, the government refused to take a decision to cut oil subsidies on the grounds that assembly elections were round the corner. In this period, the losses borne by oil PSUs rose by R78,000 crore, shaving off R7,80,000 crore from the value of these firms (assuming a conservative PE of 10, though the market values Reliance at a PE of 15 as it doesn’t have to shell out large sums for subsidies). Add the R38,000 crore that the government spent on oil subsidies in 2010-11, and the total spend on subsidies was three times that on the flagship MGNREGA, five times that on health and more than double that on education. Even after the hike, oil subsidies are likely to be R1,20,000 crore for 2011-12—R6.22 per litre of diesel, R331 per cooking gas cylinder and R24.6 per litre of kerosene.


What’s amazing is that even now, there is no automatic indexing of prices to changes in global crude oil prices. Indian prices are still lower than those in Pakistan—R41.13 for diesel vs R48.99 in Pakistan and R14.83 for kerosene vs R43.95 in Pakistan. The difference in diesel and kerosene prices (this is what causes the huge adulteration problem and the oil mafia to flourish) has actually risen from R24.43 per litre before the hike to R26.3 now! If you look at the annual hike in per capita incomes of around 15% over the past few years, prices can be raised by this much each year without hurting consumer welfare. And the government still expects investors to sink billions into the economy.


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