Oil companies, exercising their newly granted freedom to set cooking gas prices every month, have caused the government considerable embarrassment by announcing a hike in prices three days before elections in Himachal Pradesh, where fuel bills have become a political issue. Buying liquefied petroleum gas at Rs. 922 a cylinder will stretch everyone’s budget and hit the poor hardest. At this price, cooking gas becomes prohibitively expensive for households earning Rs. 10,000 a month. On September 14, the government had imposed the cap on subsidised cooking gas at six cylinders in a year and allowed the State-owned oil companies to revise prices every month on the average international price of the previous month. The UPA could have saved some face by nudging the oil companies to delay their November price announcement till after the Himachal elections.
Between now and 2014, 13 states will go to the polls and the government will have to keep an eye out on the election calendar before it allows oil companies to announce rates for LPG cylinders sold without subsidy. This will limit the recent reform initiative that allowed cooking gas prices to float. The price of diesel, which soaks up most of the country’s fuel subsidy, can reasonably be expected to be kept suppressed by the same political compulsions. Over the past two years, state elections have come in the way of raising diesel prices. They were hiked only twice, the last time in September by 15% setting off nation-wide protests and splintering the ruling alliance. The pressure will mount by the day over the next 18 months till the scheduled general elections. And the longer the delay in adjustment, the harder it gets to raise fuel prices.
This makes finance minister P Chidambaram’s job that much more difficult. The 2012-13 budget had targeted food, fuel and fertiliser subsidies at 1.9% of the gross domestic product (GDP). The growth assumption in the budget has turned out to be optimistic and Mr Chidambaram had warned in September subsidies could swell to 2.4% of the GDP this fiscal year. This week, he announced fiscal correction benchmarks that will cap the deficit at 5.3% of the GDP and cutting it further in stages to 3% by 2016-17. The fuel subsidy is not only straining the fisc, it is widening the trade gap and exerting pressure on the rupee. Yet decontrol of the prices of transport and cooking fuels remains outside the political debate. The finance minister is thus thinking laterally on technology-enabled cash transfers in five years to deliver all government subsidies to beneficiaries.