After prospects of a higher subsidy outgo on food and fertilisers, the government is faced with the spectre of a higher petroleum subsidy. Rising crude oil prices and its inability to increase fuel prices is all set to spoil the government's subsidy calculations. The country meets 80 per cent of its crude oil demand through imports.
Petroleum subsidy, estimated at about Rs 50,000 crore (Rs 500 billion) at the beginning of the current financial year, has now jumped 50 per cent to Rs 75,000 crore (Rs 750 billion), thanks to the relentless rise in crude oil prices.
Under the current subsidy-sharing mechanism, one-third will be borne by public sector upstream oil companies, while the rest is to be shouldered by the government.
So, the government's share that was estimated at around Rs 33,300 crore (Rs 330 billion) at the start of this financial year has now ballooned to Rs 50,000 crore (Rs 500 billion).
"For an emerging economy like India, higher oil prices lead to inflation, a fall in tax revenues and an increase in the budget deficit, which drives interest rates up. Net oil importing countries such as India normally experience deterioration in their balance of payments, putting a downward pressure on exchange rates.
As a result, imports become more expensive and exports less valuable, leading to a drop in real national income. All these call for appropriate policy responses," Union Petroleum Minister S Jaipal Reddy said at the International Energy Forum in Riyadh.
The Indian basket of crude oil has averaged around $99.37 per barrel so far in February, up 5.85 per cent from the January average of $93.87. The current fiscal average price is $81.96 per barrel, up over 17 per cent from the FY09 average of $69.76.
The underrecovery, or the revenue losses, of public sector oil marketing companies (OMCs) on selling diesel today stands at Rs 10.74 a litre. The OMCs are also losing Rs 20.56 on selling a litre of kerosene and Rs 356 for every 14.2-kg LPG cylinder.
Petrol price has been decontrolled with effect from June 26, 2010. Still, the companies incur a loss of over Rs 2.50 a litre as they have not been able to pass on the entire price hike.
"Oil prices are surging higher as it became clear that the current unrest in Libya, the world's 16th-largest producer of the black gold, would disturb production and could culminate in a regime change," said a research report from RBS.
Libya, which accounts for about 2 per cent of the global crude production, is the first major oil producing country to be hit by a political turmoil.
"There has been no supply disruption anywhere, still prices are moving up. A real disruption will cause further increase. I may sound pessimistic but we can witness the similar northward journey of 2008 (when crude hit an all-time high of $147 per barrel)," former ONGC chairman R S Sharma said.
