The decline in brent crude prices to $98 per barrel comes as a relief for the gasping Indian economy, but a closer look reveals that fiscal deficit may well overshoot the target and oil marketing companies (OMCs) will not benefit unless the government raises the prices of regulated fuels.
Oil prices and the exchange rate play a critical role in determining the under-recovery for the oil marketing companies and the actual subsidy burden which the government takes up. Motilal Oswal Securities Ltd in a recent report points out that under recoveries for OMCs would be around Rs 1,369 crore and the subsidy bill would remain around Rs 82,100 crore in FY12. The current calculations are higher than Rs 43,000 crore made in budget provisions.
Motilal Oswal Securities Ltd in a recent note added, “Even at oil price of USD100 per barrel, there is a risk of fiscal slippage of 0.4% of GDP, purely on account of oil. We would need an extraordinary fortunate circumstance of oil price dropping to $70 per barrel coupled with an exchange rate of 45 per dollar to reach the near-zero level of petroleum subsidy for FY13 envisaged in the budget.”
Impact of falling crude price on oil marketing companies is again too early to cheer about. Kotak Institutional Equities Ltd sees the recent correction in crude prices as a modest positive for government owned upstream companies because subsidy sharing burden will come down only moderately as seen in the chart below.
Overall, gross under-recoveries are expected to come down slightly in FY13 from FY12 as crude is expected ease to an average of $108 per barrel. Kotak Institutional Research expects the government to hike prices of LPG by Rs 50 per cylinder, Rs 2 per litre for kerosene and Rs 4 per litre for diesel from August 1, 2012.