Budget 2018: Budget 2018-19 has assumed the average price of the Indian basket of crude in 2018-19 to be $57.50 a barrel, the same as last year, and estimated the petroleum subsidy for the year at Rs 24,900 crore; however, many analysts reckon the possibility of average cost of imported crude to be around $62.50 a barrel in the next fiscal while crude at $65 a barrel cannot be ruled out either. Given that 80% of the country’s crude consumption is met through imports — state-run ONGC and OIL also resort to import parity pricing — crude at $62.50 a barrel and the rupee at the current level (~64 against the dollar) would mean an additional oil subsidy requirement (oil marketing companies’ under-recoveries) of over Rs 8,000 crore on LPG and kerosene, the only two products under price control. If the crude prices average at $65 a barrel, then at the current exchange rate the additional subsidy needed over the budgeted level will be close to Rs 12,000 crore. Also, oil price above $65 a barrel could put pressure on the government to reimpose price controls on petrol and diesel in some form.
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Finance secretary Hasmukh Adhia has already gone on record to state that if crude hardens, the government would indeed consider cutting the excise duties on petrol and diesel to give relief to consumers and avoid a spike in inflation. Excise hikes on the two decontrolled petroleum products had fetched the exchequer a massive bonanza. While the duties were hiked nine times between November 2014 and January 2016, excise duty collections from these products went up from Rs 99,000 crore in 2014-15 to Rs 2,42,000 crore in 2016-17. The Economic Survey released last week noted that one of the biggest potential risks to the Indian economy in 20118-19 is global crude oil prices; oil may turn costlier by 10-15% in 2018-19 from the 2017-18 level, the survey noted. In 2017-18, the average price of the Indian basket of crude oil had risen by 14% compared with the level in 2016-17, the survey said. The peaking of US production, however, has allayed fears of a spike in crude price but Saudi Arabia, in a tie-up with Russia, is expected to undertake aggressive output cuts ahead of listing of Saudi Aramco.
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According to a post-Budget report by Bank of America-Merrill Lynch, “If oil prices remain high, the government may have to allocate more towards subsidies, or reinstate some sort of subsidy sharing mechanism amongst oil companies.” The upstream companies have not been sharing subsidy burden since the end of September 2015 given low crude oil prices. The report estimates overall under-recoveries at Rs 36,300 crore for 2018-19 considering average crude oil prices at $62.50 per barrel. Importantly, there is unpaid subsidy of around Rs 23,00 crore on kerosene in 2017-18, which will inflate the subsidy bill from oil companies in the next year. The latest Budget has put kerosene subsidy for 2018-19 at just Rs 4,200 crore, compared with (revised estimate) of Rs 8,662 crore for 2017-18. To be sure, kerosene consumption is on the decline — many states and UTs including Punjab, Haryana, Delhi and Chandigarh have gone 100% kerosene-free and others like Uttar Pradesh, West Bengal, Bihar, Madhya Pradesh and Rajasthan have cut consumption of this cooking fuel that used to be used by the rural low-income households for lighting too, substantially.
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Kotak Institutional Equities noted, “The shortfall (in oil subsidy budget) raises concern on the possibility of subsidy sharing with PSU oil companies in 4QFY18 and FY2019, as the case was until 1HFY16 when global crude prices averaged above $57/bbl. The government has not imposed burden on upstream companies since then, as quarterly or annual average of crude price has remained well below $55/bbl until 2QFY18.” “Up to $70 per barrel for crude oil (Indian basket), I do not think that the government will put burden on us especially given that we have just Rs 36,915 crore for Hindustan Petroleum Corporation,” said an ONGC executive, adding that crude oil prices may not skyrocket as US production has peaked.
LPG subsidy has been pegged at Rs 20,377 crore for 2018-19 against a revised estimate of Rs 15,656 crore for 2017-18 given that the government expects subsidy to increase with the planned increase of the number of beneficiaries under Pradhan Mantri Ujjwala Yojana (PMUY) to 8 crore compared with the earlier target of 5 crore. “The increase in LPG subsidy is due to an increase in the number of Ujjwala beneficiaries expected. We are paying Rs 250 for the last three months now as subsidy for each LPG cylinder, so that has to considered too,” said a government official. Even though the Budget said the PMUY is “to provide free LPG connections” to poor women, the government only gives Rs 1,600 per connection under the scheme wherein the actual cost of the connection along with kit and a first LPG cylinder is around Rs 3,200. The balance is either paid by beneficiaries upfront or in instalments. The LPG subsidy is available only for refills and these are not completely free.