Govt walks the tightrope on fuel pricing

That the Government is determined to “bite the bullet” on fuel subsidies will be music to the ears of oil companies, except that this is going to be easier said than done.

The Congress' allies will be in no mood to agree to a fuel-price hike, especially when the general consensus is that the Budget is already inflationary. In the bargain, the Finance Minister's projection of Rs 44,000 crore on fuel subsidies could just jump three-fold by the end of 2012-13.

As oil industry sources say, the biggest burden is diesel on which they are losing over Rs 12 a litre. This is only one side of the story. The fuel also accounts for over 50 per cent of the oil companies' losses as its use goes beyond the automotive arena. The fear within oil industry circles is that the power crisis in the country is already leading to rampant use of diesel and, consequently, higher losses.

Subsidies overshoot

In last year's Budget, the Finance Minister had set aside nearly Rs 24,000 crore for fuel subsidies when, in reality, the Government's share of the compensation package will end up being over three times as much.

Of the total losses of Rs 1.4 lakh crore projected for this fiscal, the upstream sector (Oil and Natural Gas Corporation with support from Oil India and GAIL) is expected to bear nearly 40 per cent, with the refining trio of Indian Oil Corporation, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd absorbing around 12 per cent. The balance of nearly Rs 70,000 crore will have to come from the Government, if the refiners have to stay afloat.

Things are going to be even more difficult during 2012-13 with Brent crude oil prices already inching towards $130 a barrel and tension looming with the Iran crisis.

Sources say this could result in losses incurred on diesel, kerosene and cooking gas touching Rs 2 lakh crore annually in the process.

Hike inevitable

Little wonder, therefore, that the Government is determined to increase prices though it is not going to be an easy task against fierce political opposition. In fact, it remains to be seen if the oil companies will have the freedom to hike petrol prices even though it was removed from administered pricing mechanism nearly two years ago.

At present, losses on petrol are Rs 5 a litre and sources say it will be a ‘near miracle' if it sees a price increase of even Rs 3 a litre. And to think petrol is a deregulated commodity whose pricing is left to the refiners. In reality, they will end up losing Rs 6,000 crore this fiscal on petrol and will not be compensated a dime in the process.

Quite clearly, the Budget's goal of capping fiscal deficit at 5.1 per cent of GDP during 2012-13 will not be achieved unless there is a hike in fuel prices. Budget 2011 had projected 4.6 per cent which ballooned to 5.9 per cent largely because prices of diesel and cooking gas remained untouched. Can the Government do something different this time around? Only time will tell.

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