It is ''unwise'' to subsidise petroleum consumers: NCAER

By Staff
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Google Oneindia News

New Delhi, Jun 20 (UNI) Prestigious think tank, National Council of Applied Economic Research (NCAER) has said that it is not prudent to protect the consumers of petroleum products at the cost of government finances, which would also take a hit because of the bonds issued to the oil companies.

''It is unwise to allow government finances to worsen to protect the consumers, especially through untargeted subsidies'', the NCAER said in its monthly report Macrotrack.

It said the government had helped the Oil Marketing Companies (OMCs) come out of the red by issuing oil bonds worth Rs 11,500 crore in 2005-06. ''The impact of this measure would be reflected on government finances in the future'', the NCAER said.

Interest burden on the oil bonds issued to OMCs will be borne by the government and their redemption adds to the government's liabilities. Ideally, the full pass-throughs of the increased global prices to the consumers would be best alternative if only the government finances and the OMC balance-sheets were to be considered.

However, full pass-through would have other consequences through rising prices (leading to higher wage bill for the government), higher interest rate and slower economic growth.

The NCAER said the high subsidy levels raise the issue of proper targeting of subsidies. All households using LPG receive subsidy: poor, middle class, rich or very rich. ''If the richer households consume more LPG compared to lower/middle income household, the LPG subsidy is greater for the rich'', it said.

The same holds for petrol and diesel. In the case of kerosene, it has been estimated that the 38.6 per cent of kerosene supplied through the Public Distribution System is either leaked/diverted for non-household use, black marketing and PDS purchases by households without a ration card.

The government has reduced customs and excise duties on petroleum products to lighten the burden of high global crude prices on consumers. But that has hurt its revenue collections.

However,the advalorem nature of duties, renders the impact on under-recovery smaller. The plight of OMCs sets back fiscal consolidation process as the government loses corporation tax and non-tax revenue in the form of dividend payout from these PSUs.

''Thus, the govenment finances are affected by the petro prices in more ways than one'', the NCAER said.

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