“It is just a thinking… one more to the many such that exist.” This is how a senior official of Indian Oil Corporation described a reported proposal to withdraw LPG subsidy to Members of Parliament, representatives of State Legislative Assemblies and gazetted officers. The disenchantment with the way the issue of petroleum product pricing and under-recoveries of state-owned oil marketing companies is very evident from his reaction. This is not without reason. Over the years, several recommendations have been made highlighting the need to withdraw subsidies on petrol, diesel, liquefied petroleum gas and PDS kerosene.

The Strategic Planning Group on Restructuring of the Oil Industry, set up by the government in 1995, suggested a gradual phase out of subsidies for various reasons. “The subsidies and cross-subsidies have resulted in wide distortions in the consumer prices and do not reflect economic cost of petroleum products, which are not being passed on to consumers automatically. In turn, this has led to inefficient use of precious fuels and large scale misuse of highly subsidised products,” the group had noted.

Many more committees studied the conundrum even as international crude oil prices soared and the country's dependence on oil imports swelled. There were also attempts to dismantle the administered pricing mechanism for petroleum products by the BJP-led NDA government.

Though the UPA government deregulated petrol, it retained the power to sanction price revision.

“The subsidy regime in domestic LPG is by far the most egregious and distortionary of all the subsidies in the oil sector,” said the report of the Committee on Pricing and Taxation of Petroleum Products headed by C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council.

The committee, which submitted its report in February 2006, noted that below poverty line households constituted about 10 per cent of the total domestic LPG consumers. “Providing subsidy of this order [Rs.171 per cylinder then] to what is overwhelmingly a non-poor segment of the society, especially in the context of fiscal stringency, is clearly indefensible.”

“Removing subsidy on domestic LPG is an urgent imperative,” it said and recommended “an immediate one-time upward adjustment in the price of domestic LPG by Rs.75/cylinder. It is also necessary to gradually increase the price of domestic LPG so that the retail price adjusts completely to the market level eliminating the subsidy altogether.”

Cap on cylinders

Various recommendations were made by other committees towards curtailing the subsidy bill and curbing diversion of the fuel. These included a cap on the number of cylinders, ranging from 6-8, a household could draw in a year. Such a move would reduce consumption as the alternative would be the expensive commercial cylinders, priced almost four times that of the subsidised product.

According to the Ministry of Petroleum and Natural Gas, the under-recovery for oil companies, as on May 16, on every domestic cylinder is Rs.480. The daily under-recovery for the oil marketing companies, on diesel, LPG and kerosene, is Rs.509 crore. The IOC, on behalf of the other OMCs, too had, a few months ago, highlighted the need to increase petrol prices by around Rs.8 a litre.

With the oil companies hinting at possible disruptions in supply, it is difficult for the government to wish away the thorny issue of oil pricing. With the budget session of Parliament set to conclude this week, the government may be constrained to take a call sooner than later.

The options available though are limited. For, the repercussions could be many. Reducing excise duties on petrol and diesel is a tough choice for a resources-stretched government. Increasing the prices would further fuel inflation with consequential fall-out on fiscal deficit.

In his budget speech, Finance Minister Pranab Mukherjee estimated the fiscal deficit to be 5.1 per cent of the GDP.

The weakening of the rupee against the U.S. dollar only compounds the problem for the government. On the back of crude oil and gold imports, the trade deficit in 2011-12 stood at $184.9 billion.

What may possibly work is a combination of strategies involving hike in prices of some products and measures to restrict consumption of others. Mr. Mukherjee has also underscored the need for austerity measures.

On the timing, the earlier the better as the IOC official says: “There is a point to which we can borrow and conduct business.”

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