Govt’s petroleum subsidy projection at Rs 30,000 cr for FY16 on right track: experts

The government’s petroleum subsidy burden, projected at Rs 30,125 crore for the next financial year, is on the right lines and will be adequate to cover its share of burden of under-recoveries of oil marketing companies (OMCs), subject to major shifts in global crude oil prices, experts say.

The government had announced a revised figure of petroleum subsidy for the current financial year at Rs 60,000 crore and pegged the subsidy at Rs 30,000 crore for 2015-16 in the Union Budget tabled in Parliament on Saturday. The next financial year’s estimate of petroleum subsidy comprises Rs 22,000 crore towards cooking gas and the rest Rs 8,000 crore for kerosene sales.

Analysts estimate OMCs’ gross underrecoveries to land at Rs 77,000 crore in FY15 and Rs 42,500 crore in FY16, based on an assumption of a crude oil price of $ 60 a barrel and a rupee-dollar exchange rate of 62.

Underrecoveries are the losses OMCs incur on selling regulated fuels such as diesel, liquid petroleum gas (LPG) and kerosene below their cost prices.

According to equity research firm Prabhudas Lilladher, the fact that the government’s overall subsidies are not seen rising in the next financial year is a major highlight of this year’s Budget. “The petroleum subsidy has seen a decrease of 50 per cent owing to lower crude oil prices. With the beginning of direct transfer of LPG subsidies and low crude prices, the maneuverability of the government to provide less has been high,” the firm said in a report.

In 2013-14, when the Indian basket of crude oil price averaged at $ 105 a barrel, OMCs’ gross underrecoveries on subsidised sales stood at Rs 1,39,000 crore, including Rs 62,000 crore losses on diesel, Rs 46,000 crore on cooking gas and Rs 30,000 crore lost on kerosene sales below cost of supply. Of the total gross underrecoveries, the government had to shoulder the burden by Rs 70,000 crore (50 per cent), while the upstream firms had to bear Rs 67,000 crore (48 per cent).

In 2014-15, the Indian basket of crude oil price has averaged at $ 89.8 a barrel in the 10 months between April 2014 and January 2015. OMCs have suffered gross underrecoveries of Rs 67,000 crore during this period including Rs 10,000 crore losses on diesel, Rs 34,000 crore loss on cooking gas and Rs 21,000 crore lost on kerosene sales. The government has borne a half of this under-recovery burden. It has also revised the budgeted petroleum subsidy of Rs 63,427 crore to Rs 60,270 crore, attributing the Rs 3,157-crore savings to “discontinuation of post-administered pricing mechanism (APM) subsidies”, according to Budget documents.

Analysts expect global crude oil prices to average between $ 70 and $ 80 a barrel in 2015-16. OMCs’ gross underrecoveries are broadly estimated to be close to Rs 55,000 crore based on a crude oil price of $ 70 a barrel and rupee-dollar exchange rate of 63. In that case, the government and the upstream firms might have to bear Rs 28,000 crore each as subsidy burden, assuming the compensation is split in half.

In the medium-term fiscal policy statement, part of the Budget documents, the government say: “With deregulation of diesel prices and rationalisation of LPG subsidy, it is expected that the provision for fuel subsidy kept in the Budget should suffice.” It added that in the current financial year, there was scope for some saving in the subsidy bill for petroleum and the easing of international prices of crude oil, provided the “much-needed opportunity” to introduce some reforms in fuel prices and clear some of the financial burden.

The government has also listed in the macro-economic framework statement for 2015-16, the launch of direct benefits transfer in LPG, new gas pricing policy and the de-regulation of the diesel prices as the major policy reforms in the subsidy regime witnessed in the first nine months of FY15.