COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Govt divided over subsidies on kerosene, LPG

Rajesh Ramachandran in New Delhi

Despite Petroleum Minister Vazhapadi Ramamurthy's grand claim of retaining subsidies in the petroleum sector, the government may not be inclined to burden itself with such a risky task.

Ramamurthy had announced on assuming office that the dismantling of the administered price mechanism would go ahead as per scheduled form April 1, but that the reduction of subsidies would be reviewed.

The previous United Front government, while dealing with the burgeoning oil pool deficit last year, decided to dismantle the APM and link the domestic prices of petroleum products to international prices.

At present kerosene in India costs at roughly one-third its international market price, while liquefied petroleum gas is also heavily subsidised. The subsidy for kerosene costs the government Rs 60 billion per annum and Rs 14 billion for LPG.

On the other hand, since petroleum products are cross-subsidised (that is, one petroleum product supports the other) petrol in India costs around twice the global rate. Aviation turbine fuel is also very expensive in India. However, diesel prices in India are more or less on a par with international prices.

Also, a fallout of the administered price mechanism was that Indian prices stayed fixed even as international prices fluctuated, until the government stepped in.

The APM dismantling is to be done gradually over a period of three years so as to ease the burden of rising prices. In the first part, in the current financial year 1998-99, kerosene subsidy would be reduced by 30 per cent, and by 20 per cent the following year. The cuts in the subsidy for LPG would be 33 per cent and 15 per cent respectively.

It is in this context that Ramamurthy said that the government would review the matter of reducing subsidies. Kerosene and LPG are popular domestic fuels, the former specially among the poor people, and any price rise will cause discontent among the populace.

A Bharatiya Janata Party economic ideologue admitted that a review of such a sensitive subject would not be done hastily but only after the finance ministry assesses the financial implications involved.

But the current logic is that since the hard decision of doing away with the subsidies was taken by the previous government and for which it paid the political price, why reopen the Pandora's box by stalling the dismantling of the APM.

"It does not make sense to reverse such a difficult decision since it can always be blamed on the previous government," said a senior BJP leader, "And the BJP has only made a commitment on farm subsidies, that too with the condition that only deserving farmers gain from the subsidy."

"Dismantling the APM will place petroleum products under import commodities wherein custom duties can be levied," pointed out former Oil and Natural Gas Corporation chairman and managing director S K Manglik. "This will cause domestic prices to go up and that is why I don't think it will happen overnight."

"Once the prices of the petroleum products are linked to the international prices, naturally kerosene and LPG will be dearer," added Manglik. "If the government is keen to abolish cross-subsidy after dismantling the APM, then it would have to offer direct subsidy to kerosene consumers and to allocated for this from the general budget."

While Ramamurthy's trade union background is said to be the reason for his statement on subsidies, it remains to be seen whether the government is ready to undertake the extra financial burden of subsidising the items.

In another development, the role of the national oil companies, who buy oil from abroad and get it refined at the public sector refineries, is also under a cloud. As of now, these oil companies and the refineries are paid a fixed price for their investment. If they go by market prices, their operations will become unviable as the international prices for most of the products have fallen sharply today due to a major glut of oil in the world markets.

The petroleum ministry is still thrashing out the modalities of how to dismantle the APM in such a manner that the national oil companies will still be able to carry on with their operations.

Meanwhile, members of the Oil and Petroleum Exporting Countries have also announced an emergency meeting are also holding meetings to boost oil prices further by cutting production.

However, such price fluctuation, will not affect India for some time to come. Even after the APM's dismantling begins from on April 1, minor price fluctuations will make little difference immediately as bulk contracts have already been given. It will take some time before changes in international prices will have a cascading effect on Indian prices.