To cut subsidy, make bulk users of diesel pay more: Kotak

Moneycontrol Bureau

Brokerage house Kotak Securities is of the view that charging bulk users a higher diesel price is easier to implement, than an across-the-board phased hike, as the government looks to cut fuel subsidies.

"We believe higher market-linked prices of diesel for the direct bulk consumers will be relatively easier to implement and may reduce the subsidies meaningfully. Nearly 18% of diesel is consumed by bulk customers including railways, state transport undertakings and private industrial companies, who do not deserve any subsidy, in our view," says the Kotak note.

Kotak strategists Sanjeev Prasad and team say the government’s proposal to increase cap on subsidized LPG cylinders per household per annum to nine from the current limit of six, is a retrograde step.

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"We expect the annual savings on LPG subsidies to reduce to 9% assuming the proposed cap of nine cylinders per household per annum versus 28% assuming current cap of six," says the Kotak note.

Yet, the government could reduce the impact on the subsidy bill by raising LPG prices even if the limit is raised to nine cylinders per household, write Prasad and team.

And while the proposal to hike fuel prices in a phased manner makes sense, the Kotak strategists say implementation would hold the key.

"If implemented, it may lead to meaningful savings on fuel subsidies. However, we will wait for actual implementation of the proposal before reviewing our earnings estimates for the oil PSUs. Even if implemented, we doubt that the Government will be able to raise prices after 3QCY13, given several state elections in 4QCY13 and general elections in 2QCY14," said the Kotak note.