India's government on Thursday hiked the price of diesel by Rs 5 per litre and restricted sales of subsidised LPG cylinders to six per consumer every year, in a bid to rein in the nation's ballooning fiscal deficit but dealing a blow to innumerable households.
Even though prices of kerosene or petrol were not hiked, the raise in the LPG prices was seen as a significant blow to the budgets families who rely on the fuel for cooking, prompting a nationwide outcry against the ruling Congress-led United Progressive Alliance (UPA) coalition.
The hike, that also is expected to stave off the threat of India becoming first of the major emerging economies to lose its credibility internationally and downgraded to junk, immediately prompted a backlash from allies and opponents of the coalition government.
According to government data, about 56 percent of all domestic LPG users consume more than six cylinders per year.
In a media statement, the government said that the Cabinet Committee on Political Affairs (CCPA) met on Thursday under the chairmanship of Prime Minister Manmohan Singh to consider the situation of fuel subsidies adding to the deficit.
The government said it "projected massive under-recoveries of Rs 1,87,127 crore for the financial year 2012-13 in the wake of high international crude oil prices and sharp depreciation of Indian Rupee against US Dollar".
"The uncompensated under-recovery causes loss to the Public Sector Oil Marketing Companies (OMCs)," it added.
In a bid to correct the situation somewhat, the government said it had decided to increase in price of diesel by Rs 5 per litre excluding VAT.
"Out of this, Rs 1.50 per litre is on account of increase in Excise Duty. The balance increase of Rs. 3.50 per litre will reduce the under-recovery of OMCs by about Rs. 15,000 crore for the remaining part of the current financial year," it said.
"The under-recovery on sale of Diesel during 2012-13, even after this price hike is estimated to be above Rs 1,03,000 crore. The revised RSP of Diesel in Delhi will be approximately Rs 47 per litre. Further, branded Diesel will be sold at the market rate," it added.
The government said it was not mandating an increase in the price of petrol, although the current under-recovery on the fuel is about Rs 6 per litre. "The consequent loss to the OMCs will be offset through reduction in Excise Duty on Petrol by Rs 5.30 per litre," it said.
Supplies of subsidised LPG cylinders to each consumer to was also being capped at 6 cylinders (of 14.2 Kg) per annum, the statement said.
"This will help in reducing the under-recovery by about Rs. 5,300 crore for the remaining part of the financial year. The under-recovery on sale of Domestic LPG during 2012-13, even after this measure, is estimated to be above Rs. 32,000 crore," it added.
"Any number of cylinders will be available over and above the cap of 6 cylinders at market rate. The number of subsidized LPG cylinders available to each consumer in the remaining part of the current financial year will be 3 cylinders," it further informed.
The government said that while subsidised cylinders will continue to be available at Rs 399 per cylinder (at Delhi), the market rate of LPG cylinders at non subsidized rates will be notified by the OMCs on monthly basis.
It further said that no increase in the price of Kerosene sold through the Public Distribution System currently at Rs 14.83 per litre (at Delhi) will continue to lead to an under-recovery of Rs 32,000 crore for the OMCs on sale of Kerosene during 2012-13..
The decisions taken on Thursday will reduce the under-recovery of OMCs by about Rs 20,300 crore and the under-recovery for 2012-13 will be about Rs 1,67,000 crore which is more than the under-recovery of Rs 1,38,541 crore incurred by OMCs during 2011-12.