Advocating raising fuel price with rise in input cost, the pre-Budget Economic Survey on Thursday asked the government to pay a fixed amount per litre as diesel subsidy so as to cut subsidy outgo.

"For diesel, where even the rudimentary first step for freeing prices has not yet occurred, a possible intermediate step is to fix a per litre subsidy from the government," said the Survey that sets context for the Budget to be presented by Finance Minister Pranab Mukherjee on Friday.

"In other words, for every litre of diesel sold by an oil-marketing company, the government will give a fixed subsidy of a certain number of rupees," it said.

The Survey advocated shifting the burden of higher international oil prices to consumers to not just limit government's subsidy bill but also curb diesel consumption.

Currently, the finance ministry meets about half of the revenue that state-owned oil firms lose on selling diesel, domestic LPG and kerosene at government-controlled rates. It provided Rs 41,000 crore fuel subsidy in 2010-11. This fiscal, the oil firms are projected to lose over Rs 137,000 crore in revenue.

"If the price of crude rises, with the subsidy per litre fixed, the consumer's price will rise and so the signal to save on the use of diesel will be transmitted," it said.

The Survey said it was possible to make this system more sophisticated by requiring that the per-litre subsidy be raised if the price rises too high, in order to cushion the consumer.

What is important is that the subsidy should be pre-specified so that, thereafter, government stays fully out of the picture.