In 2011-12, outflows on oil subsidies could for the first time exceed central revenues from the oil sector.
This week, oil marketing firms were denied permission to raise retail petrol prices, for fear that there would be an adverse impact on the United Progressive Alliance’s prospects in Assembly elections. An earlier request for a price hike was refused in December, due to apprehensions that the winter session of Parliament would be disrupted by protests. Given election schedules, retail prices may remain static until end-February. Until there are price hikes or the price of crude oil comes down, the Petroleum Planning and Analysis Cell (PPAC) reckons “under-recoveries”, as losses are euphemistically known, will balloon by some Rs 388 crore a day. In 2011-12, the PPAC projects under-recoveries will amount to over Rs 1,32,000 crore, much more than the 2010-11 under-recoveries of Rs 78,190 crore. The first half has already seen under-recoveries of roughly Rs 65,000 crore — which amount to 96 per cent of the Budget estimates of under-recovery for the whole fiscal year!
Indeed, if the latest estimates are correct, outflows on petro subsidies could substantially exceed central revenues this financial year. This would be a new landmark in the (mis)management of energy pricing, in which several convoluted formulae ensure the right hand gives subsidies which the left takes away in the form of various taxes. The trend is explicable by several factors. First, India’s crude oil import basket has averaged out at $111/barrel in 2011-12, compared to $76.5/barrel last year. Second, the rupee has weakened. The Reserve Bank of India (RBI) says in its December 2012 report: “Consequently, the government’s expenditure on petroleum subsidies could turn out to be much higher than the budgeted level for 2011-12, unless steps are taken to deregulate the prices of administered petroleum products.”
The Centre directly bears two-thirds of losses, while one-third is shared out between retailers and upstream public sector undertakings (PSUs). Hence, the government’s direct subsidy to the sector may be over Rs 90,000 crore. Central revenues will drop an estimated Rs 50,000 crore, due to reductions in excise duties and removal of customs duties in June. Altogether, the Centre’s revenues – direct and indirect taxes, corporate income tax, dividend, tax on dividend and profit petroleum – from the sector will probably top out at about Rs 86,000 crore. In 2010-11, by way of contrast, central revenues amounted to over Rs 1,36,000 crore — and subsidies were around Rs 51,000 crore. Clearly, the oil sector will add to the government’s woes this year, putting greater pressure on its finances; the balance sheets of listed PSUs, too, will be hit. The problems with the complex subsidy-cum-tax regime that this sector “enjoys” have been obvious for at least a decade. Maybe the additional stress on central finances will finally induce the government to take the RBI’s advice, and plunge into decontrol.