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Oil & Gas Subssidy Cuts – Now or Never ?

June 4, 2010

The Indian Oil & Gas sector reforms are unlikely to move forward if not implemented in FY11E. In a similar no election period in 2000 price of subsidized products were hiked aggressively including 2.8x hike in kerosene price. Reforms if not implemented in FY11E will be difficult to implement thereafter.

From FY12E there is spate of elections in every year until FY15E. A group of ministers (GoM) appointed on the oil subsidy issue is expected to have its first meeting on June 7. There is hope of at least some progress on reforms. The hope is due to the recent aggressive APM gas price hike.

Two committees were formed in 2006 and 2008 to suggest solutions to the subsidy problem. No real action was taken on their proposals to resolve the subsidy problem. Comprehensive reforms would mean eliminating the auto fuel subsidy and cutting LPG-kerosene subsidy as proposed by the expert group. Deregulating auto fuels is possible especially if oil prices are modest.

What is Proposed and Expected ?

  • The expert group has made the following proposals to cut the subsidy
  • Deregulate auto fuel (gasoline and diesel prices)
  • Rationalize kerosene allocation through public distribution system (PDS) so as to cut volume by 20%
  • One-time kerosene price hike of Rs6/litre (67%)
  • One-time LPG price hike of Rs100/cylinder (32%)
  • Periodic price hikes in LPG-kerosene. LPG price hike in line with rise in per capita income and kerosene in line with growth in per capita agricultural GDP
  • Eventually subsidized kerosene and LPG should be sold only to below poverty line (BPL) families

Stay tuned for Monday when the decision will be out.

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