Centre gets aggressive on subsidy issue - Views on News from Equitymaster

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Centre gets aggressive on subsidy issue

Mar 23, 2000

The government's decision to reduce the subsidy on kerosene, liquefied petroleum gas cylinders (LPG) and aviation turbine fuel (ATF) is likely to go down well with international rating agencies that have recently upgraded India's rating outlook. In a recent interview with equitymaster.com, Ms Kristin Lindow, Vice President/Senior Credit Officer in the Sovereign Risk Unit at Moody's Investors Service, stated 'what we did expect and did not see in the new budget was more aggressive spending restraint, a more significant withdrawal of subsidies'... (Read the interview).

In a move that is likely to be opposed by most (vote hungry) political parties, the government has more than doubled the price of kerosene sold through the public distribution system, hiked the prices of LPG cylinders by 15% and that of ATF by 30%. The move is expected to reduce the subsidy bill of the government by over Rs 53 bn.

The government’s initiatives need to be applauded, albeit with caution. Governments in India have had a track record of going back on proposed subsidy cuts. A roll back this time would not surprise many especially in view of the coalition that is running the country. Then there is the issue of whether the revision in prices will help the government contain the deficits. The answer is a ‘NO’, unless of course oil prices decline significantly. This is mainly due to the fact that the price of diesel, one of the largest contributors to the deficit, has been left untouched. So where does that leave the country?

The deficit in the oil pool account is not reflected in national accounts. It has been aptly termed as a ‘hidden’ subsidy. Just to throw light on this issue, hidden subsidies in India amount to over 10% of GDP as compared to the explicit subsidy bill of approximately 1% of GDP. Therefore, the budget documents will show little change, even though there would be a significant improvement in the overall fiscal position.

Free pricing of all petroleum products (including diesel) is a permanent solution to the problem of deficits in the oil pool account. However, as a measure to protect the interests of the ‘weaker sections’ of the society, the government should provide subsidies (no denying that).

The rise in prices of these products will benefit the oil refining companies. This is mainly due to the fact that the oil pool account would now be able to make payments to companies in a more timely manner as compared to times when the deficit ballooned and as a result the cash flows dried.

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