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Business News/ Politics / Policy/  Narendra Modi gets help from cooling crude oil prices
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Narendra Modi gets help from cooling crude oil prices

With the crude oil price coming down and the rupee also stabilizing, the government could save up to `5,000-6,000 crore in oil subsidies

A file photo of Prime Minister Narendra Modi. Photo: AFPPremium
A file photo of Prime Minister Narendra Modi. Photo: AFP

New Delhi: Falling international crude prices could provide a respite to the Narendra Modi-led National Democratic Alliance (NDA) government on the subsidy front and enable it to meet its ambitious fiscal deficit target for the year to next 31 March.

Finance minister Arun Jaitley’s Union budget for 2014-15 calculated the fuel subsidy bill assuming a crude oil price of $110 per barrel. With the price coming down to $100.04 per barrel (on 18 August) and the Indian rupee also stabilizing around the 60 per dollar mark, a rough calculation shows that the government could save up to 5,000-6,000 crore in oil subsidies if crude prices remain around these levels till the end of the fiscal year.

The 2014-15 budget estimated India’s subsidy bill at 2.6 trillion, or 2.03% of gross domestic product (GDP), with oil subsidies amounting to 63,500 crore. Food subsidies of 1.15 trillion and fertilizer subsidies of 73,000 crore were the other major components of the subsidy bill.

Falling international crude prices, a stable rupee and continuation of the monthly price hikes for diesel could contain the subsidy bill, said Devendra Kumar Pant, chief economist at India Ratings and Research Pvt. Ltd.

India plans to contain its fiscal deficit at 4.1% of GDP in 2014-15, against 4.5% of GDP in the previous year.

“The under-recovery for diesel could fall to below 1 per litre because of all these reasons. So the actual subsidy bill for this year may fall. However, rollovers from last fiscal year of around 35,000 crore could impact the subsidy math," Pant said.

Under-recovery refers to the difference between what it costs oil refiners to produce one litre of diesel or petrol from crude oil and the price at which they sell the product.

According to the International Energy Agency (IEA), the world’s crude oil markets are well-supplied despite the conflict in Ukraine and Iraq. The price of crude oil reached $132.47 per barrel in the Indian energy basket in July 2008. The price averaged around $105.52 last fiscal against an average of $111.89 per barrel in 2011-12.

It will take some time for the benefit of lower crude prices to flow to oil companies and the government because companies follow trade parity pricing.

According to the petroleum planning and analysis cell (PPAC), which works under the petroleum ministry, the under-recovery on diesel in the second fortnight of August will go up to 1.78 per litre compared with 1.33 per litre in the first fortnight of August.

As per the pricing mechanism, refinery gate price, the price at which oil marketing companies (OMCs) sell the product to their retail outlets, is arrived at by adding various cost elements associated with import of products to their FOB (free on board) price.

Pricing has been a vexing issue for the oil sector.

While the finance ministry is in favour of export-parity pricing to reduce its subsidy burden, the oil ministry is in favour of the current practice of trade parity.

The current method calculates the so-called under-recoveries as the difference of the import and export prices of petroleum products in an 80:20 ratio, as India imports 80% of its oil demand. Under export-parity pricing, oil marketing companies will be compensated the difference between domestic and export prices of products.

India has an energy import bill of around $150 billion, expected to reach $300 billion by 2030. India imports 80% of its energy needs.

The under-recovery on kerosene and domestic cooking gas for the second fortnight of August continued to be 32.98 per litre and 447.87 per cylinder, respectively. According to PPAC, OMCs are incurring a daily under-recovery of about 230 crore.

India decided in February 2013 that it would increase diesel prices by 50 paise per litre every month, in the wake of the government removing the product from the purview of the administered price mechanism.

The decision was taken to correct the fiscal situation and send the right signal to rating agencies.

“We anticipate a full deregulation of diesel prices over the next few months, as we expect the newly elected government to continue supporting the INR 0.4-0.5 per litre price hike that has been in place since early 2013," Moody’s Investor Services said in a note on Tuesday. “Any decision to increase fuel subsidies in India or slow the pace of fuel price deregulation will be credit negative for the refiners."

According to analysts, a one dollar change in the price of crude oil in the Indian energy basket has an impact of 8,000 crore on under-recoveries. OMCs such as Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) had combined under-recoveries of 1.4 trillion on diesel, domestic cooking gas and kerosene in the last fiscal year. The under-recoveries for the fiscal year 2014-15 are currently projected to be 91,665 crore.

Shares of oil retailers gained on Tuesday on BSE. While shares of HPCL gained 2.39% to close at 451.10, BPCL rose 3.93% to end at 674.10 and IOC advanced by 1.6% to 358.20, the benchmark Sensex rose 0.11% to 26,420.67 points.

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Published: 19 Aug 2014, 02:51 PM IST
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