Don't stop LPG reforms PDF Print E-mail
Tuesday, 02 January 2018 00:00
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Shobhana edit

When crude prices rising, especially, need to cut subsidies

The government’s decision not to increase the price of cooking gas every month as it has been doing but to, instead, subsidise the cost for consumers, smacks of populism. As part of a plan to try and phase out the subsidy on LPG cylinders, prices were being raised by `4 per cylinder every month since July last year. However, with prices of crude oil having seen a sharp uptick over the past few months, the subsidy has jumped to Rs 251 per cylinder as on December 1, 2017, up from Rs 41 per cylinder in September.

The price of the Indian basket crude is hovering around $62/barrel and could go up further. This means it could take several years for the subsidy to be wiped out, if prices are raised at the current pace. With eight state elections scheduled in 2018 and the Parliament elections due in mid-2019, the government probably believes it is worth taking the hit in return for some goodwill. More so, since the economy is yet to fully recover from the impact of demonetisation and the rollout of the GST. In early October, ahead of the elections in Himachal Pradesh and Gujarat, excise duties on petrol and diesel were reduced by Rs 2 per litre. While that was no doubt a relief for consumers, the estimated loss to the exchequer for about six months in 2017-18 is Rs 13,000 crore.

To be sure, the government has mopped up a big amount as revenues from excise duties on auto fuels at a time when oil prices were falling. While the prices of crude oil halved between FY15 and FY16, the government hiked excise duties. Consequently, taxes from the oil sector rose from Rs 1.3 lakh crore to Rs 2.1 lakh crore and dividends from oil PSUs rose by about Rs 0.9 lakh crore. In FY17, revenues from the oil sector rose further to around Rs 2.7 lakh crore. The government had allocated Rs 16,076 crore for LPG subsidies in the budget for 2017-18 but the bill could be bigger.

That, in turn, would pressure the bigger fiscal deficit—unless compensated by revenues from other sources—at a time when the government’s finances are somewhat strained. Of course, another way to look at it would be to say the savings from LPG costs would be spent on goods that in turn would fetch the government excise duties. Nevertheless, there will be the added pressure of a bigger trade deficit since India imports three-fourths of its oil requirements. The oil import bill for 2017-18 is pegged at close to $81 billion, up 15% over the $70 billion in 2016-17. But given how sharply the price of crude oil internationally has risen—nearly 50%, to $66.87 per barrel over the last six months, from the lows of $44.82 per barrel in June—the bill could be bigger.


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