Despite the June fuel hike and deregulation of petrol prices, the government petroleum subsidy in the current year will be much higher than last year, creating pressure on the fiscal health of the country.
The subsidy currently is Rs 17,108 crore, about 14 per cent higher than the Rs 14,954 crore given out in the entire 2009-10. This is despite the fact that the government has so far committed only Rs 3,108 crore cash subsidy to compensate oil marketing companies for their revenue loss for 2010-11.
The Rs 14,000-crore subsidy approval for which the government sought parliamentary approval yesterday has already been accounted for by the oil marketing companies in the January-March quarter as receivables. In the government budget, it would be accounted this year. With global crude oil prices ruling around $80 a barrel, the government subsidy burden will rise further this year though it may postpone taking part of the burden on its books to next year.
The benchmark Indian basket has breached the $75 average which was taken into account while arriving at the decision in June. It averaged around $77 from April 1 to August 2, a 10 per cent increase over $70 average in 2009-10. The Cabinet decision of fuel hike was based on a $75 average.
| SUBSIDY BURDEN Revenue loss incurred by oil marketing companies on sale of auto and cooking fuels (In Rs cr) | |||
| 2010-11 | |||
| 2009-10 | Pre-June 26 | Post June 26* | |
| Petrol | 5,151 | 7,000 | 2,100 |
| Diesel | 9,279 | 23,000 | 14,000 |
| LPG | 14,257 | 19,000 | 20,000 |
| Kerosene | 17,364 | 23,000 | 17,000 |
| Total | 46,051 | 72,000 | 53,100 |
| Govt subsidy for petroleum | Cash | Bonds** | |
| 2009-10 | 14,954 | 10,306 | |
| 2010-11 | 17,308 | ||
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*Hike estimated at crude oil average of $75 a barrel
**Bonds are not accounted for while calculating fiscal deficit
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Revenue loss on petrol at Rs 7,000 crore constituted about 10 per cent of the total underrecoveries, estimated at about Rs 72,000 crore prior to the increase in prices. Though the subsidy is now contained, the fact is that 70 per cent of the estimated underrecovery after the hike is due to LPG and kerosene pricing, that has not been decontrolled.
“The decontrol of petroleum prices has not happened. Even in petrol, price should change daily alongside the international price. Still a lot of subsidy will have to be paid because of LPG and kerosene,” said M Govinda Rao, member, Prime Minister’s Economic Advisory Council.
Senior executives in government-controlled oil marketing companies maintained the June decision would not change the situation substantially for the government since subsidy on petrol in any case was being provided by upstream companies last year.
“The decontrol of petrol price still leaves a balance underrecovery which will have to be absorbed somewhere in the system, that is by the government, the oil marketing companies or the upstream companies. So far, we have had an ad hoc burden sharing formula. So, from that perspective, petrol decontrol is a direct relief. However, the decontrol in petrol and marginal increase in diesel, kerosene and LPG prices has been done on the assumption of a static crude oil price ($75 per barrel) which unfortunately is not true,” ONGC Chairman and Managing Director R S Sharma had earlier told Business Standard.
Another official in the ministry of finance echoed his views but added that “at least a right signal has gone” that the government is open to the idea of total deregulation of petroleum prices.
Petroleum Secretary S Sundareshan pointed out that without the hike, the subsidy burden would have gone up further. He said a total deregulation was not possible in one go due to political compulsions. “Whatever changes have been made are significant. We will build upon it,” Sundareshan told Business Standard.
Rao said the hike did provide a cushion to some extent but if subsidy was not tackled there would be fiscal concerns and the government would need to cut expenditure on other items. “We will have to live with subsidy for some time. Politically it is not possible in the short-term but it can be made possible,” he added.