How Government Will Finance Oil Subsidy For The Current Year?

In his Vote on Account, though the Finance Minister P Chidambaram has pegged oil subsidy for FY15 at Rs 63427 crore, what he budgeted for the current fiscal for oil subsidy wouldn’t be enough to meet the current year’s requirement. For the current year, the government has estimated oil subsidy at around Rs 1.40 lakh crore while it has budgeted Rs 80800 crore from the exchequer. But, considering the present situation, it is still not clear how the government will finance the balance subsidy in the current fiscal. 

During FY13, the government rolled over around Rs 45000 crore of oil subsidy to this year, and with the Finance Minister budgeting Rs 65000 crore earlier, just Rs 20000 crore remained left with the government for the subsidy this year. Considering this, now the Finance Minister has again raised the bar to Rs 80800 crore for the current year. But the interesting part is that this figure will also not be ample to satisfy the current fiscal subsidy bill.

As per the estimate, out of the Rs1.40 lakh crore, around Rs 60000-65000 crore would come from upstream oil companies like ONGC-OIL as under recovery discount, while out of Rs 80800 crore just Rs 35800 would be available for the current year. Even if we compile this figure, then also out of Rs 1.40 lakh crore oil subsidy, Rs 44200 would be left unattended. Experts feel that this government has two options; firstly they can again roll over the amount to next year and satisfy with next year’s budgeted subsidy as done in the past or secondly, they can increase the figure of under recovery discount from upstream companies. “I don’t think the government will ask for more under recovery discount from the upstream companies as we have a fixed formula, and they also have an option of roll over. Then where is the problem?” quips A K Banerjee, Director Finance ONGC. 

If the government decides to roll over the subsidy burden to next year then it will create a problem for Oil Marketing Companies (OMCs) as they will not get cash compensation from the government on time. This will certainly increase the interest burden for OMCs, as they have to resort to huge debt to finance the oil purchase commitment. 

It is interesting to note that though the government finance is under recovery, it doesn’t compensate the interest part of it. In Q3 also, IOC, BPCL and HPCL posted huge loss due to partial doling of under recovery and if the government again decides to roll over part of subsidy to next year, then this may create havoc for the companies. All-in-all it is the financial engineering that the government would resort to in order to save its face in terms of oil subsidy, but its impact on companies, both upstream and downstream, can be severe.