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Business News/ Politics / Policy/  Budget 2015: Petroleum subsidy slashed by half

Budget 2015: Petroleum subsidy slashed by half

Subsidy bill estimated at Rs2.43 trillion, around 9% below the revised estimate of Rs2.66 trillion for 2014-15, with modest increases in food and fertilizer subsidies

Photo: MintPremium
Photo: Mint

New Delhi: In sync with the National Democratic Alliance government’s strategy of trimming subsidies by using technology and direct cash transfers to plug leakages, finance minister Arun Jaitley on Saturday slashed the petroleum subsidy by half and announced modest increases in food and fertilizer subsidies.

The 2015-16 budget estimated India’s subsidy bill at 2.43 trillion, around 9% below the revised estimate of 2.66 trillion for 2014-15. The reduction has been aided in part by the fall in the price of crude oil.

“Well-intentioned schemes introduced in the past have often been ill-targeted, riddled with leakages and delivered with inefficiency. The same is true of subsidies," Jaitley said in his budget speech.

“Subsidies are needed for the poor and those less well off. What we need is a well targeted system of subsidy delivery. We need to cut subsidy leakages, not subsidies themselves. We are committed to the process of rationalizing subsidies based on this approach," he added.

The cut in subsidies, one of the main contributors to India’s fiscal deficit, is expected to help improve the country’s sovereign ratings.

The petroleum subsidy is estimated at 30,000 crore for 2015-16, a cut of 50.22% from the revised estimate of 60,270.00 crore for 2014-15. The revised estimate is almost 5% below the budgeted estimate of 63,426.95 crore.

Jaitley’s 2014-15 budget had calculated the fuel subsidy bill assuming a crude oil price of $110 per barrel. The price of the Indian crude oil basket on 26 February was $59.19 per barrel. Falling international crude prices have clearly provided a respite to the Narendra Modi government on the subsidy front.

Jaitley increased allocations for food and fertilizer subsidies moderately—by 1.42% and 2.81% respectively. The budget allocated 1.24 trillion towards the fertilizer subsidy and 72,968.56 crore towards the food subsidy for 2015-16 .

About 15% of rice, 54% of wheat and 48% of sugar distributed under the public distribution system (PDS) is lost and fertilizer subsidies benefit manufacturers the most, not poor farmers, said the Economic Survey released on Friday.

While petrol and diesel prices have been deregulated, prices of domestic cooking gas and kerosene are set by the government.

Total under-recoveries—the difference between market prices and retail fuel rates—to be borne by oil marketing firms next fiscal year are estimated at 42,500 crore. The budget earmarked 22,000 crore for subsidy on domestic cooking gas and 8,000 crore for kerosene.

Besides the fall in international crude prices, a stable rupee and continued monthly price hikes for petrol and diesel could help contain the subsidy bill.

In a related development, state-owned oil marketing companies increased petrol and diesel prices by 3.18 per litre (in Delhi) and 3.09 litre per litre (in Delhi) respectively, effective midnight on Saturday.

Prices were raised by 82 paise for petrol and 61 paise for diesel from 16 February. Currently, fuel prices are reviewed once every fortnight.

“Since the above price revision, there has been further steep increase in international prices of both petrol and diesel. The INR-USD exchange rate has also depreciated slightly during this period. The combined impact of both these factors warrants increase in retail selling prices of both petrol and diesel," Indian Oil Corp. said in a statement.

Analysts say the petroleum subsidy math should add up.

“Assuming 50% share of government for meeting the under-recoveries, overall subsidy provided for 2015-16 should be adequate," said K. Ravichandran, senior vice-president and co-head of corporate sector ratings at Icra Ltd.

“However, key risks will be any sharp rise in oil prices and material weakening of INR vs USD in the near term," Ravichandran said.

In his budget speech. Jaitley spoke about the JAM trinity solution—Jan Dhan Yojana, Aadhaar and mobile numbers—as a game-changing reform for better targeting of subsidies.

The Jan Dhan Yojana is aimed at ensuring that every household in the country has a bank account and Aadhaar is the unique identity number the government wants every resident of the country to possess.

At present, central and state governments offer a host of price subsidies for rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity and fertilizers.

The proposed goods and services tax will put in place a “state-of-the-art indirect tax system by 1 April 2016", Jaitley said.

“The JAM trinity will allow us to transfer benefits in a leakage-proof, well-targeted and cashless manner," Jailtey said.

The plan is in line with the recommendations of the Economic Survey, which said that targeted subsidies are capable of boosting household consumption, asset ownership and reduce food security problems of ultra-poor households.

“The direct transfer of benefits, started mostly in scholarship schemes, will be further expanded with a view to increasing the number of beneficiaries from the present 1 crore to 10.3 crore. Similarly, 6,335 crore have so far been transferred directly as LPG (liquefied petroleum gas) subsidy to 11.5 crore LPG consumers," Jaitley added.

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Utpal Bhaskar
"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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Updated: 01 Mar 2015, 01:25 AM IST
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