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Squeeze and save.

Finmin focuses on slashing petrol subsidies to keep fiscal deficit in check

THE FINANCE ministry is depending mainly on the squeeze on the petroleum sector to slash the subsidy burden and keep the fiscal deficit in check.

The outlay for subsidies on food and interest on farm loans and exports has actually gone up while that on fertilisers it has remained the same as last year in the 2013- 14 Budget estimates.

Finance secretary R. S. Gujral told MAIL TODAY , " A ` 1 per litre increase in the price of diesel leads to annual saving of ` 8,000 crore in the subsidy bill." The phased 50 paise- perlitre increase in the price of diesel is expected to reduce the subsidy on diesel eventually to ` 6 per litre from ` 10 or more.

The Budget has scaled down subsidies on petroleum products by close to ` 32,000 crore over the revised estimate of ` 96,880 crore for 2012- 13 and the savings are expected to come mainly from diesel.

Since diesel is consumed in large quantities in the farm sector and for running public transport, it is a politically sensitive fuel.

Petrol, on the other hand, is considered a ' rich man's fuel' that can be priced at a higher level.

However, the huge gap in the price of the two fuels has led to a dieselisation of the economy with the demand for diesel cars and sport utility vehicles ( SUVs) shooting up. The increase in the excise duty on SUVs in the Budget was aimed at neutralising, at least in part, this problem.

Senior officials are keeping their fingers crossed over the extent to which diesel prices can be increased as Assembly polls in several key states are around the corner and Lok Sabha elections schedules for next year.

` 32,000 cr slash in subsidies on petroleum products in the 2013- 14 Budget over the revised estimate of ` 96,880 crore for 2012- 13 The finance ministry also wants oil marketing companies to switch to a pricing policy based on the export parity prices instead of the current system, where prices of fuels are essentially fixed on an import parity basis. This includes customs duty and a shipping cost in addition to the base price, which are notional as the petroleum products are actually produced within the country.

The switch in the pricing policy is expected to reduce the figure for under- recovery of oil companies by around ` 10,000 crore. Oil companies, backed by the petroleum ministry, are strongly opposed to this move since they also share part of the subsidy bill and a switch to export parity prices would erode their profit.

A senior finance ministry official said that the inclusion of customs duty in the build- up of prices of petroleum products was allowed in order to offset the five per cent customs duty on crude oil, which was imposed in earlier years.

However, since the customs duty on crude oil has been reduced to zero, the case for including a notional customs duty in the price of petroleum products does not hold any longer.

The customs duty on crude oil was reduced to zero from five per cent when oil prices rose steadily in 2008.

However, in the 2010- 11 Budget, the customs duty on crude was hiked to five per cent again as it is an easy way to mobilise funds.

This is what oil companies fear as they end up at the receiving end when international prices skyrocket.

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Publication:Mail Today (New Delhi, India)
Date:Mar 8, 2013

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