Toeing the line of developing economies, India has been in favour of ‘oil subsidy’ since Independence. Although oil subsidies have somewhat been instrumental in reining inflation, they have a negative impact on the fiscal deficit. Oil subsidy has become a key component of the government’s expenditure and the focal point of post-budget discussions.
At the beginning of the fiscal year, the under-recoveries of the oil marketing companies (OMCs) was expected to be in the range of R98,346 crore. But the drop in international crude oil prices brought it down considerably. Though the government shares a part of the under-recovery and another part is borne by upstream oil companies, the balance under-recovery has to be borne by the OMCs.
Oil subsidy has been a matter of concern for the oil PSUs, be it the oil marketing companies (OMCs) or the upstream oil companies. On the one hand, the OMCs have to bear a part of the under recovery and on the other, there is a time lag of six to eight months before they receive the compensation from the government. This results in liquidity crunch for the OMCs, leading to additional borrowing and interest burden.
Similarly, profits of the the upstream oil companies are affected since they share the under-recovery burden in the form of a ‘discount’ on crude oil prices.
The components being subsidised are petrol, diesel, PDS kerosene and domestic LPG. But it is often seen that the benefit of subsidy does not reach the target population.
Over time, the government realised the need to rationalise and phase out fuel subsidy. This was further propelled by the G-20 and Apec commitments and pressure from the International Monetary Fund. Hence, the government deregulated the price of petrol in 2010 followed by deregulation of diesel prices in October 2014. So, the prices on petrol and diesel are now market-determined, reducing the overall burden on the exchequer. This reduction is also visible in the budget estimates; the revised budget for fuel subsidy for 2014-15 has been estimated at R60,270 crore and the budget estimate for 2015-16 has been kept at R30,000 crore.
However, the government continues to subsidise kerosene and domestic LPG. The kerosene prices in India are far below the prices in its neighbouring countries. The price of kerosene is about R60.25 a litre in Pakistan, R53.49 in Bangladesh and R65.78 in Nepal. But the price of kerosene in Mumbai is R15.14 a litre, probably the lowest in the world. This meant an under-recovery of R16.19 per litre of PDS kerosene, despite the drastic fall in global crude prices. With a vast majority of the rural population relying on kerosene as fuel, this under recovery adds up to a substantial subsidy bill for the government. In addition, present under-recovery per cylinder of domestic LPG in Delhi stands at R143.68. Both these elements put together exert substantial pressure on the government and on the oil PSUs as well, who need to shoulder almost 50% of the overall subsidy burden.
In these testing times, the dwindling global crude oil prices do bring in some respite to the subsidy burden being borne by the oil PSUs. Average crude oil price for the Indian basket has fallen to $46.59 per barrel in January 2015 from $105.56 in April 2014. To that extent, oil PSUs have been lucky this year, but they cannot count on luck every year.
By Nabin Ballodia
The author is partner–tax, KPMG in India
