However, Energy and Mineral Resources (ESDM) Minister Sudirman Said has not given any assurance about whether it will lead to lesser consumption of biodiesel, being intensively promoted by the government.
In the 2016 State Budget (APBN 2016), a provision of Rp1,000 per liter has been kept for diesel oil subsidy. The Draft 2016 Revised State Budget (RAPBNP 2016) will have a subsidy figure based on the cut applied.
Finance Minister Bambang Brodjonegoro said the fixed diesel oil subsidy of Rp1,000 per liter in the APBN 2016 will be reduced to Rp350 per liter in the RAPBNP 2016.
As a result of the cut, the fuel oil and liquefied petroleum gas subsidies in the APBNP 2016 will amount to Rp40.63 trillion, down from Rp63.68 trillion in the APBN 2016.
Earlier, ESDM Minister Sudirman Said informed Commission VII on energy affairs of the House of Representatives (DPR) about the governments plan to cut diesel oil subsidy by Rp650 per liter and that it will form the basis of the figure in RAPBNP 2016.
Sudirman stated the government was yet to discuss the impact of diesel oil price after the subsidy cut, but it is expected to adjust itself to the market price within a three month period.
The minister admitted that the government has made significant corrections in the APBN 2016. In the energy sector, the world oil price slide was the main factor for budget adjustment.
The government would adopt the plan to reinforce its fiscal policy and to ensure the fuel subsidy reaches its target, Sudirman told the Commission during the hearing held on Wednesday (June 8).
"If the subsidy is provided through the energy sector, there is a possibility that it will be largely enjoyed by the middle and upper classes. Therefore, subsidy will be switched to social assistance schemes, health, infrastructure and education," the minister said.
If the plan is approved by the DPR and is included in the RAPBNP 2016, the price of diesel oil will not be raised until the end of this year. That is because with subsidy still remaining at Rp350 per liter, the government will have enough buffer to bear the price burden.
The government needs to make significant corrections in its APBN 2016. Besides the diesel oil subsidy reduction, the lifting of oil has also been reduced from 830 thousand barrels per day to 810 thousand barrels per day, the minister explained in his presentation regarding the RAPBNP 2016 to Commission VII of the DPR.
The lifting of natural gas also dropped from 1.155 million barrels of oil equivalent per day (boepd) to 1.115 boepd in the RAPBNP 2016. Electricity subsidy increased from Rp38.39 trillion to Rp57.18 trillion.
The volumes of fuel oils and liquefied petroleum gas (LPG) remained unchanged at 16.69 million kiloliters and 6.602 million kiloliters, respectively.
The government estimates had assumed the world oil price at US$40 per barrel and cut the budget for the ESDM ministry up to Rp825.1 billion. The final decisions regarding all of these assumptions will be taken after the government and the DPR reach an agreement.
In the meantime, the governments plan to cut diesel oil subsidy by Rp650 per liter is being as reasonable by the National Industry and Economic Committee (KEIN).
"The countrys economic conditions are not conducive right now, so the government needs to find a solution, such as a reduction in budget and subsidy. The people should understand this," KEIN Chairman Soetrisno Bachir said in Jakarta on Friday.
For achieving an economic growth target of above five percent, the government should be able to resist the unstable global economic conditions as a result of the low world oil prices, according to Soetrisno.
However, he said the government must not forget the social aspects, and its policy should not widen social gaps.
"The government needs to usher in and work towards equality," Soetrisno, who is a former general chairman of the National Mandate Party (PAN), said.