Stating that the subsidised diesel was taking a toll on the health and environment, the Economic Survey strongly pitched for not only a hike in prices of diesel but also called on the government to pay a fixed amount per litre as diesel subsidy to contain the ballooning subsidy bill.
“For diesel, where even the rudimentary first step for freeing prices has not yet occurred, a possible intermediate step is to fix a per litre subsidy from the government. In other words, for every litre of diesel sold by an oil-marketing company, the government will give a fixed subsidy of a certain number of rupees,” the survey said.
It called for passing on the burden of high international crude oil prices to consumers to not just limit government's subsidy bill but also curb diesel consumption. The government had provided Rs.41,000-crore fuel subsidy in 2010-11. This fiscal, oil firms are projected to lose over Rs. 137,000 crore in revenue.
“If the price of crude rises, with the subsidy per litre fixed, the consumer's price will rise and so the signal to save on the use of diesel will be transmitted. It was possible to make this system more sophisticated by requiring that the per-litre subsidy be raised if the price rises too high, in order to cushion the consumer. What is important is that the subsidy should be pre-specified so that, thereafter, government stays fully out of the picture,” the survey added. State-owned Indian Oil Corporation, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited at present sell diesel at a loss of Rs.13.55 a litre, kerosene at Rs.29.97 a litre and domestic LPG at a loss of Rs.439 per 14.2-kg cylinder. Oil firms at present lose about Rs.5 a litre on petrol.
The survey said prices were signals to consumers and sellers and all those who dealt in products of shortages (or, equivalently, the rising cost of production) and abundance. “Prices rise when there is a shortage and decline when there is a glut. Once prices are controlled, we effectively cut off these signals,” it said.
“Whether or not we give a per litre subsidy, till such time when more private firms enter this business, we may have to use a formula-based upper bound on the consumer price,” it added. It said misuse of subsidised diesel was adding to pollution and public health costs.