Subsidy bill from oil firms to pinch despite reforms

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SummaryIn our third and final part of the series on the finance ministry's strategy for subsidies this fiscal, we delve on petroleum product subsidies

In our third and final part of the series on the finance ministry's strategy for subsidies this fiscal, we delve on petroleum product subsidies. Payment obligations the ministry is likely to roll over in the coming years in relation to 3 major subsidies — oil, fertiliser and food— could be as high as R1.17 lakh crore.

The pricing reform that is underway for petroleum products coupled with a relative respite on the import cost of crude may keep PSU oil retailers' under-recoveries (and Budget oil subsidies) for FY14 significantly below last year's record level of R1.6 lakh crore. Yet, the government is likely to push at least R30,000 crore in subsidy costs in the coming years, besides retaining a heavy onus on upstream oil firms whose share of the subsidy burden has risen sharply in recent times.

Last year, a bill of R45,000 crore due for payment was not footed by the government even as it had to revise the budgeted subsidy amount to R96,879 crore (in addition, the OMCs are asking for additional arrears payment of R20,000 crore on account of interest costs suffered due to delayed release of subsidies, losses on oil bonds, a demand the finance ministry feels is not obligatory).

This year's under-recoveries are currently estimated to be around R1.4 lakh crore.

The budgeted subsidy amount for the year is R65,000 crore, 32% less than the revised estimate for last year. Most likely, the budget estimate for oil subsidies won't see a major revision as the finance minister P Chidambaram presents an interim budget early next year.

The final under-recoveries' amount for FY14 would depend on the rupee's movement in the rest of the year and global crude oil prices.

Official sources said in worst-case scenario, R40,000 crore in oil subsidies may be rolled over to future budget. In that case, inclusive of the subsidy bills on food (R43,000 crore) and fertiliser (R34,000 crore) likely to be left unpaid, an amount of R1.17 lakh crore would be rolled over this fiscal.

Analysts fear the phased deregulation of prices of diesel (the subsidy obligation on which is the highest) may falter as the country approaches general elections. This will also reduce the government's ability to reduce the subsidy bill from OMCs.

The government and upstream oil firms compensate oil retailers — IOC, HPCL and BPCL —

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