Wiser from FY12 shock, Budget to peg crude at $110

Written by Sunny Verma | Himani Kaushik | New Delhi | Updated: Feb 29 2012, 21:15pm hrs
Union Budget 2012-13 will estimate the crude oil price of the Indian basket to average above $110 a barrel in 2012-13 as against $90 dollar a barrel set in the current fiscal, an assumption that led to a higher-than-expected subsidy outgo, officials familiar with the matter said.

The finance ministry had to sanction an additional R45,000 crore in oil subsidies this fiscal, taking the total disbursal to thrice the budgeted R23,640 crore. Higher crude prices also boosted the fertiliser subsidy bill, which is likely to cross R95,000 crore as against the budgeted figure of R50,000 crore.

Even when the Budget was announced last February, many analysts had felt the size of the Budget was estimated rather conservatively with just 3% hike over the previous year. Estimates have gone awry mainly because oil prices in the year have averaged $112 a barrel.

Sources say finance minister Pranab Mukherjee may estimate the oil subsidy for 2012-13 at roughly the same level as the actuals for the current year, which is R68,000 crore. Mukherjee will have to step up gross borrowings for the next fiscal if oil subsidy is estimated at R68,000 crore, said Planning Commission principal adviser Pronab Sen.

In the absence of decontrol of retail prices of diesel and LPG, higher oil prices can create inflationary pressures. It could also cripple any credible plan to lower fiscal deficit, while dashing hopes of lower interest rates.

The total subsidy bill of the government, including fertiliser and food subsidy, is likely to exceed Budget estimates by R1 lakh crore this fiscal.

In my opinion, a realistic calculation will bring more certainty for the industry than keeping estimates artificially low, said Siddhartha Sanyal, chief India economist, Barclays Capital.

Total borrowings of the government are now pegged at R5.1 lakh crore for 2011-12, much higher than the Budget estimate of R4.17 lakh crore. The fiscal deficit is expect to come close to 5.8% for the fiscal, up from the 4.6% Budget estimate.

Looking at the current situation, we expect fiscal deficit to be around 5.5% in 2011-12 and not below 5% for 2012-13. This would mean the central governments gross borrowing is likely to hover around R5.5 lakh crore in the coming fiscal, said Sanyal.

Some experts feel the government will have to pass on the cost to customers as maintaining high subsidies is not sustainable.

If the estimate of $110 a barrel holds good, there would be little impact of oil prices on the current account deficit for 2012-13. The deficit is expected to be 3.6% of GDP this fiscal, when oil prices averaged $112 a barrel. India imports over 80% of its oil requirements.

Crude oil prices surged sharply in the recent weeks on news of Iran cutting supplies to some European nations. Brent crude oil was at $124 a barrel on Monday, while the price of Indian crude basket was $122 a barrel.