Iraq crisis could spoil Narendra Modi govts oil subsidy math

Written by Arup Roychoudhury | Siddhartha P Saikia | New Delhi | Updated: Jun 26 2014, 19:50pm hrs
The rise in global crude prices due to tensions in Iraq could potentially throw a spanner in the Narendra Modi-led NDA govt's subsidy rationalisation plans.

With each dollar rise in price of Indian basket of crude increasing the petroleum subsidy by around Rs 4,500 crore, officials told FE that as of Tuesday, the estimated petroleum subsidies for FY15 is likely to increase by Rs 7,000-8,000 crore if the Indian basket prices stay at the current level of $110-111 a barrel of crude for the rest of the year.

The FY15 petroleum subsidy estimate of about Rs 1.12 lakh crore was calculated at an average of $107/barrel with an exchange rate of 60 for rupee against the dollar.

On Monday, Indian crude basket stood at $111/barrel. It reduced slightly to $110.96/barrel on Tuesday. The exchange rate has been range-bound so far this year and on Wednesday it was 60.23.

Finance ministry officials confirmed that Iraq had figured in pre-Budget deliberations.

We are hoping that the situation over there won't be a long drawn one. Otherwise there can be supply disruptions and it may seriously affect our fiscal plans, an official said. The situation makes it even more exigent for the government to start gradual price increases for domestic LPG and PDS kerosene. Continuing with the 50 paise a month price increase in diesel and partially decontrolling urea are the other policy options that will be pursued.

As reported by FE earlier, officials were hopeful such measures, if implemented, could save about Rs 37,000-40,000 crore from the Rs 2.46 lakh crore budgeted for food, fuel and fertilizer subsidies in the FY15 interim budget.

However, such a plan assumed there would be no major global shock in the current fiscal.

As per the interim Budget, Rs 63,427 crore is to be paid by the government for petroleum subsidies with the rest of the estimated Rs 1.12 lakh crore under-recoveries of oil marketing companies to be offset by discounts from upstream companies.

The Centre has already paid Rs 30,000 for arrears from the fourth quarter of FY14.

The way the government should go about this is to have multiple scenarios instead of working on a single number for the entire year. One should have fiscal scenarios for oil at $110, $115, $120 and so on, said Madan Sabnavis, chief economist, Care Ratings. The finance minister should also keep a limit on how much burden the Centre and the upstream companies will be willing to take. Anything above that needs to be passed on to consumers, he added.

The current under-recoveries on diesel is Rs 1.62/litre, Rs 32.87/litre on kerosene and Rs 432.71/cylinder on domestic LPG.