While the euro zone debt crisis is a looming threat to the global economy, it has brought some cheer to policymakers here. Global crude prices have fallen by $15 a barrel thanks to the European turmoil, a development which stands the Indian government in good stead as it tries to cut the worrisome fiscal deficit, as lower oil prices would reduce its subsidy burden.

Average international crude oil prices for 2010-11 were projected in the range of $85 a barrel before the euro zone crisis set in. If the price were to stay at this level this fiscal, the combined under-recoveries of public sector oil marketing companies (OMCs) would have jumped by Rs 62,000 crore over the preceding fiscal to about Rs 1.1 lakh crore?effectively wiping out the much-talked elbow room that the larger-than-expected revenue mop-up from 3G spectrum auction provided to finance minister Pranab Mukherjee to implement his fiscal consolidation plan.

In the first half of April, the average price of the Indian crude basket was $83.37 a barrel. But currently, it works out to around $70 a barrel. On Monday, Opec?s daily basket price was $71.88 a barrel. Analysts say that dollar is expected to remain strong against the euro, putting further downward pressure on crude prices. If prices stay at the current level, OMCs? projected under-recoveries on the sale of petrol, diesel, domestic LPG and PDS kerosene for the current fiscal would work out to a manageable Rs 48,353 crore. Mukherjee has targeted a fiscal deficit of 5.5% for 2010-11, as against 6.8% for the preceding fiscal.

The government has raised revenues of Rs 67,710 crore from 3G spectrum auctions. In the backdrop of 8.6% GDP growth in the fourth quarter of FY10, it also hopes to do better than budgeted on the tax revenue front.

More significantly for India, global crude oil prices have moderated at a time when the government is seriously considering deregulation of petroleum pricing to reduce its subsidy burden. An Empowered Group of Ministers is expected to meet on June 7 to decide on the implementation of the recommendations made by the Kirit Parikh committee on freeing petroleum pricing. If international crude oil prices were high, the government might have found it difficult to take a decision on petroleum price deregulation.

?Moderate oil prices would bring down OMCs? under-recoveries,? says Ajay Arora, an energy expert with global consultancy Ernst and Young (E&Y). ?Besides, low oil prices would also facilitate the government?s decision-making on petroleum price deregulation.? The average price of the Indian crude basket in 2009-10 was $69.75 a barrel, and the combined under-recoveries of OMCs for the fiscal worked out to Rs 46,051 crore.

As per the subsidy-sharing regime for the petroleum sector, upstream companies like ONGC and Oil India Ltd bear OMCs? under-recoveries on sales of petrol and diesel, while the government is supposed to reimburse under-recoveries on LPG and PDS kerosene.

However, due to its precarious fiscal situation, the government is facing difficulties in meeting its obligations on LPG and kerosene subsidy payout. While OMCs? under-recoveries on LPG and kerosene in 2009-10 was Rs 31,628 crore, the government provided only Rs 26,000 crore, forcing the OMCs to absorb the balance.

Meanwhile, upstream companies have also stated their reluctance to share OMCs? under-recoveries. ONGC and OIL had to fork out a combined Rs 32,000 crore to help OMCs meet their under-recoveries on petrol and diesel in 2008-09.

In 2009-10, the subsidy-sharing burden eroded ONGC?s net profit by Rs 6,551 crore, as the company paid Rs 11,554 crore in price discounts to OMCs on sale of crude oil.

Meanwhile, OMCs are borrowing heavily to meet their capital expenditure requirement, due to delays on the part of the government in reimbursing their under-recoveries on LPG and kerosene. Combined borrowings of OMCs increased to Rs 88,300 crore at the end of March 2010 from Rs 23,400 crore in March 2005.