Even as finance minister Pranab Mukherjee has budgeted Rs 3,108 crore towards petroleum subsidy for the 2010-11 fiscal, the amount might prove peanuts if crude starts surging in the global market?an eventuality that most analysts don?t rule out.
Any price of crude over $80 a barrel is ominous for the country?s policymakers. This is because in that case the government would have no option but to substantially increase its market borrowings. The finance minister has committed in the Budget to neutralise public sector oil marketing companies? (OMCs) under-recoveries through cash payments, closing the oil bonds window.
As per an FE analysis, the OMCs? under-recoveries could reach Rs 164,271 crore in the coming fiscal if the average price of Indian basket of crude hit $90 a barrel in the world market. The under-recoveries could rise to Rs 407,209 crore if the average crude price soars to $90 a barrel. Further, if crude touches $100, under-recoveries could go up to Rs 622,382 crore.
The price of the Indian crude basket hit a record $142 a barrel in the international market in July 2008. However, the average price of the Indian crude basket worked out to be $83.58 a barrel for the whole of 2008-09 fiscal. But even at that price, the OMCs? under-recoveries reached a record of Rs 103,292 crore in that fiscal.
After reaching $148 a barrel, the crude price hit a 5-year low of $35.98 in intra-day trading on December 19, owing to global economic recession. However, the prices have fairly recovered since then. Crude traded for $79 a barrel on Feb 26 at Nymex. With the global economy looking up, not all analysts would be surprised if the average crude oil prices hit $90-100 a barrel in the coming fiscal.
Under the existing petroleum subsidy-sharing mechanism, shares of the government, upstream oil companies and OMCs vary from year to year. Currently, ONGC, Oil India Ltd (OIL) and GAIL India pay price discounts on sales of crude oil, LPG and kerosene to help OMCs meet their under-recoveries on the sale of petrol and diesel, while the government is supposed to bear subsidy on LPG and kerosene. However, upstream companies have stated their difficulty in continuing to share the OMCs? under-recoveries.
Significantly, the government failed to evolve consensus over how the under-recoveries for the third quarter should be shared. So in the end, it asked upstream companies to maintain status quo until a final decision is taken. Upstream companies made subsidy contributions as per the formula decided for the second quarter.
Apparently, the government is also not in a position to show resolve to implement the Kirit Parikh Committee?s recommendations on petroleum sector deregulation. Not only the Opposition parties but also the UPA allies like Trinamool Congress and DMK have opposed even a marginal hike in petrol and diesel prices following the Budget decision to hike taxes. The government raised the excise duty on petrol and diesel by Rs 1 a litre in the Budget and also restored customs duty on crude. Accordingly, oil companies raised the prices of petrol and diesel by Rs 2.71 a litre and Rs 2.55 a litre, respectively. In Delhi, petrol now costs Rs 47.43 a litre and diesel Rs 35.47 a litre.
The Budget 2010-11 merely says that the Parikh Committee?s recommendations would be discussed in due course. That means the government?s fiscal consolidation plan is hugely vulnerable to potential volatility in the global crude oil market.
