Over 20,000 crore shortfall seen in fuel subsidy outlay for FY20

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Published: February 27, 2019 5:11:26 AM

Brent crude oil prices started rising from April this year and reached a peak of $86 a barrel in October.

The FY20 fuel subsidy bill could be about Rs 35,000 crore if Indian basket crude prices. (Representational photo)

The Centre may have under-budgeted for fuel subsidies by as much as Rs 20,000 crore for FY20 as it did not make enough provisions to pay the arrears, most of which are for FY19. As against FY19 fuel subsidy bill of around Rs 45,000 crore, including Rs 5,000 crore arrears from the previous year, the Centre’s Budget outlay for the year is only Rs 24,833 crore. The lower allocation was partly due to Rs 20,000 crore provision made towards income support scheme for small and marginal farmers in Q4FY19.

The FY20 fuel subsidy bill could be about Rs 35,000 crore if Indian basket crude prices (which is about $1/barrel lower than Brent crude price) remain at around $60/barrel (current level), the rupee remains at the current level and acceleration in subsidised LPG consumption under PM Ujjwala Yojana (PMUY) occurs as planned. The Budget provision for fuel subsidy in FY20 is only Rs 37,478 crore, leaving very little cash for settling the arrears of PSU oil retailers (IOC, BPCL and HPCL).

“Such a delay (in payment of oil subsidies) would increase the state-owned oil and gas companies’ working capital requirements and lead to higher borrowing at a time when they continue to invest heavily in their capacity expansion plans,” rating agency Moody’s has said. High capital spending, combined with government’s push for higher shareholder returns and a delay in subsidy reimbursement, will result in a weakening of their credit metrics, it added.

Brent crude oil prices started rising from April this year and reached a peak of $86 a barrel in October. The Indian basket crude oil prices, which averaged $56.45/barrel in FY18, shot up to $71.71/barrel in April-December of FY19. In December 2018, the crude price averaged at about $58/barrel. However, the fuel subsidy outgo will likely remain robust due to PMUY’s increasing coverage with 6.7 crore new connections being issued since May 2014. Though refilling of LPG cylinders was weak initially, it has now picked up with the government claiming that 80% of the beneficiaries come back for at least their first refills. As per a CAG report for FY17, the Centre is using off-balance sheet financing model for deferring other budgetary outgo such as fertiliser subsidies/arrears through special banking arrangements; food subsidy bills/arrears of Food Corporation of India (FCI) through borrowings from NSSF/banks, etc.

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