Govt's petro subsidy burden might ease

Could be lower than Budget estimate if recent crude oil price trend stays - and if Rs value stays stable

The government’s estimate of subsidy burden on sale of petroleum products for the current financial year could be lower than the Rs 63,426 crore estimated in the Union Budget.

Global crude oil prices have been falling for some days. The international price of the Indian basket came down to $105.7 a barrel on Thursday as compared to the $110 used by the finance ministry to calculate the subsidy. The prices have declined 5.5 per cent from the $111.94 on June 19, on receding fear about major supply disruption in West Asia.

The government controls the retail selling price of diesel, kerosene and domestic cooking gas (liquefied petroleum gas, LPG). This results in underrecoveries to oil marketing companies (OMCs), partly compensated by the government as subsidies. The Budget provides for Rs 59,837 crore for this purpose. This includes Rs 3,590 crore for freight subsidy for far-flung areas and supply of natural gas to the northeast region.

The petroleum sector's gross underrecoveries are expected to be Rs 1,04,500 crore for 2014-15, with the budget providing Rs 33,200 crore, in addition to the carry-forward of Rs 30,220 crore from 2013-14. “This could be largely adequate if the absolute burden of upstream companies at around Rs 67,000 crore does not decrease vis-a-vis 2013-14,” said K Ravichandran, senior vice-president at ratings agency ICRA.

OMCs are currently incurring a combined daily underrecovery (revenue loss) of Rs 271 crore on the sale of diesel, kerosene sold through PDS and domestic LPG. The total for 2014-15 is projected to be Rs 91,665 crore, compared with Rs 139,869 crore in 2013-14.

The government had identified diesel as the “most important commodity which poses the greatest risk to fiscal consolidation process” in the Budget. This is despite the monthly price rises of 50p a litre since January 2013. Its price has risen by Rs 10.68 a litre since then, in 17 instalments.

OMCs currently lose Rs 3.40 on sale of every litre of diesel, apart from a loss of Rs 33.07 a litre on kerosene sold through the PDS and Rs 449.17 on every subsidised LPG cylinder. They'd increased prices of non-subsidised LPG by Rs 16.5 a cylinder earlier this month. The rise was reversed the next day in states where state-specific duties had jacked-up costs. “Although it is difficult to predict the behaviour of crude oil prices, it is unlikely to go beyond $120 a barrel, given the supply buffer Saudi Arabi and other countries have,” said Debasish Mishra, senior director at Deloitte.

Prices have remained range-bound between $80 a barrel and $120 a barrel in the past. Any cooling in oil prices might ease the petroleum subsidy burden in the short term but it would largely remain around the budgeted levels, if the rupee’s value remains stable.