Budget math likely to go awry

As the benchmark Indian crude oil basket touched the highest point of the current financial year at $123.11 a barrel, an Israel-Iran conflict has emerged as the biggest concern for the government ahead of the Budget.

Till now, the government and oil marketing companies were hoping crude oil would stabilise since the oil subsidy burden had already gone out of hand. Oil refiners are now keeping their fingers crossed on the rupee. The appreciating Indian currency has come as a saving grace in the current situation. “At least, the rupee is appreciating against the dollar and it is a positive sign. From a level of Rs 53 for a dollar, the rupee has strengthened to around Rs 49 and has been a saving grace,” said P K Goyal, director (finance), IndianOil.

A senior official from the Prime Minister’s Office said while the government was trying to bring growth on track and the Budget numbers were being worked out, apprehensions of the situation aggravating in West Asia had emerged. “The problem is the Indian government cannot do anything except to wait for the situation to improve.” Goyal says the revenue loss of the three companies that currently stands at Rs 447 crore may increase by Rs 40-50 crore from the next fortnight due to the current rally in crude oil prices. Rupee movement is, however, of greater concern to the companies. If the rupee weakens by Rs 1 against the dollar, the industry’s under-recovery for the whole year increases by Rs 9,000 crore. Against this, a dollar increase in crude oil increases the industry’s under-recovery by Rs 4,000 crore.

On the whole, there is no shortage of crude oil globally at present and given the economic situation in Europe prices should have come down, but the market is being driven by speculation and sentiment, says Goyal. The impact of the rise is also seen on the spread (the margin between crude oil and the product).

Addressing the meeting of the consultative committee of parliamentarians on the petroleum ministry, petroleum minister S Jaipal Reddy, too, underscored the impact of geopolitics. “Economics in the energy sector are also being affected by the dynamics of the global political scenario, and an economic sanctions regime is leaving an adverse impact on the demand-supply situation,” he said.

Oil marketing companies (OMCs) have been holding on to the retail prices of diesel, LPG and kerosene since June 2011, when the price rise came with a cut in tax. The government took a hit of Rs 37,000 crore in revenue loss. Besides, from a budgeted Rs 20,000 crore, the oil subsidy bill has so far risen to Rs 50,000 crore. “We don’t know how prices would move. If crude prices rise the subsidy burden will increase if there is no adjustment in the domestic product prices,” said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.

With Assembly elections in five states, the government has not even allowed an increase in the price of petrol this year. Even if the government opts for an increase in the prices of petrol, diesel, kerosene and LPG now, the gains would be limited as there is only one month left for the financial year to end. Besides, the required increase is much too high to be passed on fully. In the case of diesel, for instance, the required hike is Rs 11 a litre, which would bring in Rs 8,000 crore in a month to the industry. A double-digit hike, however, is ruled out.

OMCs are looking for full compensation from the government and upstream companies. "In order to make a reasonable profit, the companies have asked the ministry of petroleum and natural gas to compensate 100 per cent of our under-recoveries as in 2008-09," said Goyal. Every week, the company sends a letter seeking government compensation for the revenue loss.

“For the nine-month period of this year, the companies have been compensated 84 per cent of the loss but we want 100 per cent compensation for the year. Without that, none of the three companies can post a profit this year,” said Goyal.