August 12:The prices of diesel will have to be raised by Rs 1.79 a litre and that of LPG by Rs 38.85 per cylinder if the government accepts the report of the Sengupta committee on oil price adjustments.

The committee, headed by Arjun Sengupta, Planning Commission member, had Vijay Kelkar, petroleum secretary, and NK Singh, revenue secretary, as its members. Its main suggestion, of compensating the oil companies' dues through the issue of 10-year bonds, is already close to acceptance.

However, the committee has really made a composite recommendation that would not only shift the existing "stock" (Rs 15,500 crore) of oil pool burdens to the government account, but also make sure that there are enough "flows" into it to avoid the buildup of another deficit. This the committee proposes to ensure by a mix of three actions:

* Removal of all subsidies to high speed diesel (HSD) this financial year. This would mean an immediate raise in prices by Rs 1.79 a litre at the storage point, which would work out to Rs 2 at the petrol pump.

* Abolition of the LPG subsidy in two years-50 per cent this year and the other half in the next fiscal. This would translate into a Rs 38.85 hike in prices per cylinder this year, with another rise of an equal amount coming next year. The total subsidy is reckoned at Rs 77.70 per cylinder currently.

* Adoption of a dual price strategy for kerosene subsidy. Families below the poverty line will then get kerosene at Rs 2 a litre; those above the poverty line at Rs 4. In case the government finds it difficult to implement a dual pricing scheme, the committee has suggested an across-the-board hike of Rs 1.20 a litre.

The total impact of these price increases, including any subsidies taken over by the budget, would be Rs 12,406 crore annually. The committee feels that at current prices, the pool account would have run an additional deficit of Rs 9,000 crore during 1997-98. The price increase would, thus, more than cover the deficit, including any interest owed to the oil companies for outstanding payments.

Oil industry insiders wonder whether the government will ever gather the political will to push through the price increases, but they are a bit hopeful after seeing the initial moves to shift the oil pool burden to the budget through the issue of 10-year bonds to oil companies.

The committee's proposals are aimed at minimising the existing financial subsidies on different products so as to limit the financial outflows from the oil pool account even after the main deficit is absorbed into the general budget.

It has suggested that in future, the price of diesel (HSD) should be related to the "landed cost parity price" to avoid the generation of further deficits. This means that all increases in the international prices or reductions in domestic output of diesel must be fully passed on as price revisions or duty adjustments.

As for LPG, the committee believes that even if the subsidy burden of Rs 77.70 per cylinder is removed in two years, the prices in India would be below that of neighbouring countries like Pakistan, Bangladesh, Sri Lanka, the Philippines and Thailand.

In the case of kerosene, the committee has recommended a formula to link the subsidies directly to the surpluses available in the oil pool from other petro-products. The financial subsidy should be less than or equal to the surplus on motor spirit (petrol) and aviation turbine fuel, but after providing for the servicing of debts to oil companies.

For 1997-98, the committee has proposed that 40 per cent of the total allocation of kerosene should be targeted at families below the poverty line at Rs 2 a litre, retaining the subsidy at Rs 4.99 per litre. For those above the poverty line, there would be an increase in price of Rs 2 a litre (total price: Rs 4), with a subsidy of Rs 3 a litre.

In the case of fertiliser inputs (like naphtha, furnace oil, low sulphur heavy stock) the committee has called for a temporary shift of the burden of subsidy away from the oil pool account to the budget till the price increases can be passed on in the form of fertiliser price increases.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.