India: Govt may roll over Rs. 40,000 crore oil subsidies to 2014-15

In the article by the Hundustan Times, There is say in India to keep a subsidy on crude oil going for the remainder of 2013 and 2014-2015 this would cause a burden or expenditure of  Rs. 1,40,000 crore compared to the targeted Rs. 65,000 crore target. This is expected to increase the deficit, but in the article it states that this subsidy is expect to be cancelled out by decreasing expenditure in other areas so that a deficit does not occur or to weaken the impact of expenditure,
Now In class learned that a subsidy will increase the Pw to the red line as displayed in this graph. The effects of this would be Consumer Surplus would lose a and b, Producer surplus would gain a,b and c, Government would lose b,c,d,f,g and h as displayed by this graph. This would leave the net effect of death weight loss of b and d and a loss of terms of trade of f,g,h assuming that India is a large country when it come to crude oil and can have an effect on world price. The item we did not consider was the fact that government need to pay this subsidy to producers and find a way to pay it. That is the problem that India faces,

At the end of the article it made statement where the government had a hard time deciding if they should subsidize oil at all but it was stated to them that it would hurt domestic production and increase imports. This leads us to the question: Should government subsidize, we all ready know that if its a large country what the effects would be, but if government did subsidize would that hurt domestic production? Product would probably decrease and there would be an increase of imports but would that effect our terms of trade worse than if we subsidize the good?