A slow ascent

Consumers get used to small but regular price hikes, that's the lesson the government refuses to learn.

Given the backdrop of elections, it is unlikely that the government is going to raise petroleum prices by anywhere near what Kirit Parikh has recommended, even though, at Rs 1,61,029 crore, under-recoveries in 2012-13 are 30 times what they were a decade ago. With diesel under-recoveries at Rs 10.24 per litre, kerosene at Rs 38.32 a litre and LPG at Rs 532.86 per cylinder, Parikh wants an immediate Rs 5 per litre hike in diesel prices, Rs 4 per litre for kerosene and Rs 250 for LPG, while cutting the number of subsidised cylinders from nine per year to six.

But, if nothing is done in the short window between elections, the government has to be prepared for one of two outcomes. It either agrees to ditch the red line called the fiscal deficit and gives the oil PSUs more money borrowings by PSUs have jumped from Rs 67,000 crore in March 2008 to Rs 1,39,000 crore in March 2013 to fund their operations, or it accepts lower supplies for critical fuels like diesel, kerosene and cooking gas, with cash-strapped PSUs unable to pay for them. Each one dollar hike in global crude oil prices leads to under-recoveries rising Rs 4,500 crore in a year and each one rupee fall in the currency's value vis-a-vis the dollar means a Rs 8,000 crore increase in these subsidies.

Though both have stabilised for now, the rupee could well start falling again once the US economy gathers steam or when the RBI tells oil PSUs to resume buying dollars from the currency markets right now, oil PSUs source $10-12 billion each month directly from the RBI. So while the Parikh committee estimates a Rs 1,38,000 crore under-recovery for 2013-14, this rises to Rs 1,60,000 crore if the rupee goes to 65 per dollar; if oil prices rise from the current $110 or so to $120 and the rupee is at 65, under-recoveries jump to Rs 1,83,000 crore. That is why it is critical the government raises prices regularly. In the case of cooking gas, for instance, given the hike in per capita incomes, LPG price, which was Rs 310.35 as of April 1, 2010, can be raised to Rs 519.98 by April 1, 2014, without affecting consumer welfare in the least the current price, however, is just Rs 410.50 and the subsidy is Rs 532.86. Failing this, Parikh-type drastic surgery is the only option.

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