Rising crude could leave Rs 14,000 cr shortfall in govt's petroleum subsidy payout

Analysts reckon state-owned oil refiners will lose Rs 46,000 cr by selling fuel below market rates in 2015-16 if crude averages $70 a barrel

The first sign of worry for the NDA government on the oil front has come with the fuel subsidy estimates likely to fall Rs 14,000 crore short if high oil prices persist.

Analysts reckon state-owned oil refiners will lose Rs 46,000 crore by selling fuel below market rates in 2015-16 if crude averages $70 a barrel. “Add to it Rs 8,000 crore carry-over of the fourth-quarter subsidy from the last fiscal year and the petroleum subsidy for the current year goes up to Rs 54,000 crore,” said K Ravichandran, senior vice-president and co-head of corporate sector ratings at ICRA.

“This translates into a shortfall of Rs 14,000 crore against the revised budgeted petroleum subsidy of Rs 40,000 crore,” he added. The government’s fuel subsidy estimate was based on crude oil at $70.

Ravichandran said the calculation factored in savings from cash transfers for cooking gas. The government might again have to ask state-owned oil exploration companies to share the subsidy, he said. “It seems unlikely the government will allow upstream firms to keep the bonanza they enjoy from oil at $70,” he added.

Crude oil at $68 is a 44 per cent rise from the January low of $49. The hike benefits upstream companies like Oil and Natural Gas Corporation (ONGC), which were recently spared from sharing the fuel subsidy with refiners like Indian Oil Corporation.

Ravichandran, however, said the rise in crude oil prices was not likely to persist because global markets were well supplied and US shale oil production had not slowed down. The recent Iran nuclear deal, when finalised, would lead to increased supplies, he added.

Salil Garg, director, corporates, at India Ratings, said it was early to presume crude oil prices would average $70 a barrel. US shale output would start flowing again at $65 a barrel, geopolitical issues involving Yemen and Libya could be short-lived, and OPEC might not cut supplies, he pointed out.

“If oil averages $70 for long, the government will have three options:  Ask upstream firms to shoulder the burden, load consumers with higher prices, or revise the Budget estimate of the fuel subsidy,” he said.

In 2013-14, when the Indian basket of crude oil averaged $105 a barrel, refiners lost Rs 1,39,000 crore by selling fuel below market prices, Rs 62,000 crore on diesel, Rs 46,000 crore on cooking gas and Rs 30,000 crore on kerosene. The government bore Rs 70,000 crore of the loss and the upstream oil companies Rs 67,000 crore.    

The next year the Indian basket of crude oil price averaged $89 and refiners lost Rs 72,300 crore for selling fuel cheap. The government paid Rs 27,300 crore and the upstream companies Rs 42,800 crore. In the current fiscal year, the government initially budgeted for a fuel subsidy of Rs 30,000 crore, including Rs 22,000 crore for cooking gas and Rs 8,000 crore for kerosene.

That estimate was revised to Rs 40,000 crore, along with a decision to exempt upstream oil companies from sharing the subsidy. The surge in crude oil prices will push up petrol prices, which have already risen by 12 per cent since January to Rs 63.16 a litre. Diesel prices have gone up by eight per cent to Rs 49.57.