The government will have to make a tough choice between deregulating diesel prices and shelling out more subsidy to oil firms if crude prices continue to rise, chief economic adviser Kaushik Basu said on Wednesday.
“If crude prices reach a very high level, then we will have a policy dilemma of choosing between diesel decontrol and compromising our fiscal deficit target,” Basu said at a meet organized by the Institute of International Finance.
While presenting the Budget for 2011-12, finance minister Pranab Mukherjee had said that he was aiming to narrow down the fiscal deficit to 4.6% of gross domestic product from 5.1% estimated in the current fiscal.
Most economists say the goal is optimistic as it is based on a very low provision for subsidies.
Basu did not indicate the level of crude price at which the government would consider its policy options but hinted that it would be in favour of submitting diesel prices to market forces.
“Fuel and fertilizer subsidies will not be a concern but crude prices might be a worry,” he said.
Basu conceded that freeing diesel prices would be a difficult decision for the government given its political impact. Decontrol of diesel would add to the already high inflation and could anger voters ahead of elections in five states beginning April.
The government had in June last year agreed in-principle to deregulate diesel prices, as recommended by an expert panel headed by former Planning Commission member Kirit Parikh.
Reserve Bank of India deputy governor Subir Gokarn also said the government would prefer to free diesel prices rather than risk a higher fiscal deficit.
“If the government has committed to lower subsidies, the implication is that if crude prices go up, you are willing to pass it on (to consumers),” Gokarn said.
The government will also be looking at the inflation numbers before it considers deregulation of diesel prices.
The wholesale price index-based inflation was at 8.23% in January. The government expects inflation to fall to 7% by the end of March and has projected an average 5% inflation in the fiscal year beginning April.
In its economic review released in February, the Prime Minister’s Economic Advisory Council, chaired by former RBI governor C Rangarajan, had also suggested that diesel prices be decontrolled when inflation is in the range of 5-6%.
On food subsidy, Basu displayed confidence that the government would be able to provide more, if need be.
“I expect that the Food Security Bill, if operationalised, will come in the later half of the year, and the increase if any in expenditure can be handled”, he said.
The government’s expenditure on subsidy has risen from 1,29,708 crore in 2008-09 to 1,41,351 crore in 2009-10 and 1,64,153 crore (revised estimate) in the ongoing fiscal. It has, however, projected an expenditure of 1,43,570 crore on subsidy in 2011-12.
Rangarajan, who was a part of another panel at the same event, also dispelled concerns over the burgeoning current account deficit, which is projected at 3% for the current fiscal.