India's fuel subsidy bill could be lower than budgeted Rs 63,000 crore

The Brent crude, the price benchmark for more than half the world's oil, fell below $50 a barrel on Wednesday for the first time since 2009, on continued oversupply coupled with a slump in demand in the international market.

A strong dollar and Organisation of the Petroleum Exporting Countries (OPEC)'s insistence on maintaining market share has further aided the oil price crash, strengthening prospects for emerging economies like India, which rely heavily on crude oil imports.

Impact on India
For Indian consumers, the price crash translates into gross annual savings of Rs 48,000 crore on fuel cost for transport. This includes Rs 28,800 crore savings for truck owners, Rs 9,000 crore petrol car owners, Rs 8,600 crore for two-wheeler owners and Rs 800 crore for diesel car owners.

"The savings on fuel prices will increase the discretionary spending of consumers, leading to a pickup in India's consumption. According to our estimates, Rs 48,000 crore will be saved annually (roughly 0.4 per cent of the gross domestic product), if the current crude oil prices sustain," equity research firm Edelweiss said in a report. Petrol prices at retail pumps have come down by 17 per cent to Rs 61.33 a litre from their peak of Rs 73.6 a litre in June last year. Also, diesel prices, too, have been reduced by 13 per cent since then.

For the government, the crash means reduced pressure on current account deficit (CAD). It will also help create a healthy foreign exchange reserve, which will boost the rupee's stability against the dollar. India imports over 70 per cent of its crude oil requirement - 3.8 million barrels of oil per day (bpd).

The Indian basket of crude oil price has averaged $97.5 per barrel in the current financial year so far as against $107 a barrel in FY14. This $10 a barrel fall in average price has already saved the country around $6.5 billion - roughly a fifth of last year's CAD of $33 billion. "If crude oil remains at $60 a barrel level for the rest of FY15, India would save another $12.5 billion over the next three months. Total savings for FY15 would be around 0.9 per cent of GDP," Edelweiss said.

The new government had allotted Rs 63,000 crore as petroleum subsidy for the current financial year as against Rs 85,000 crore in the previous financial year, aiming to rein in the fiscal deficit at 4.1 per cent of GDP. The petroleum subsidy would account for 3.5 per cent of the government's total expenditure in the current financial year as against 5.4 per cent in the previous financial year, the decline mainly on account of diesel deregulation.

However, the crude price crash in play has pulled down losses on kerosene and liquefied petroleum gas sales to less than the budgeted estimates. Therefore, analysts now believe total fuel subsidy could be much lower than the budgeted mark of Rs 63,000 crore. Oil marketing companies are currently losing Rs 19.46 a litre on subsidised kerosene and Rs 235.91 on every 14.2 kg cylinder of subsidised cooking gas.