Oil Retailers May Incur Losses Of Rs 3700 Crore

The finance minister in its interim budget has proposed to give a subsidy of Rs 65,000 crore towards the fuel subsidy for the financial year 2014-15. Of the total subsidy provided, Rs 35,000 crore will be the amount for the previous year 2013-14 which has been carried forward and the balance amount of Rs 30,000 crore will be the amount of subsidy for the financial year 2014-15.

During the current financial year 2013-14 the Oil Marketing Companies (OMCs) have shoulder a subsidy burden of Rs 1,00,632 crore and the projected subsidy for the financial year 2013-14 will be around Rs 141,000 crore. Out of the total, the government will subsidies around Rs 72800 crore and the upstream companies will bear the subsidy of Rs 64,500 crore. Due to this the state owned oil marketing companies will have to bear the subsidy of around Rs 3,700 crore for the financial year 2014.

As the government will not provide any additional subsidy the state owned retailers like Indian oil Corporation (IOCL), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) will have to bear a quadrupled amount in this fiscal year as compared to Rs 900 crore bear during the previous fiscal year 2012-13. Of the total amount of its subsidy the upstream companies till now  have given subsidy of Rs 47,972 crore and the balance amount of around Rs 16,500 will be borne during the last quarter of the financial year 2013-14. 

Till December end 2013 the government has given a subsidy of Rs 27,772 crore and also it is yet to give subsidy of Rs 10,000 crore for the current financial year 2013-14.The balance amount of Rs 35,000 will be carried forward for the financial year 2014-15. 

According to Petroleum Planning & Analysis Cell, the public sector Oil Marketing Companies (OMCs) currently lose Rs 399 crore daily on selling the diesel, PDS kerosene, domestic LPG at government controlled rates. The OMCs lose around Rs 7.16 per litre on diesel and Rs 36.34 per litre on kerosene sold through the public distribution system, while on domestic LPG the oil marketing companies lose around Rs 605.80 crore on sale of each cylinder. 

The OMCs are making tremendous losses. If these subsidies are not compensated, their borrowings from the market will increase. Currently the OMCs has borrowed around Rs 1,30,000 crore. The government has taken decision to increase the diesel prices by 50 paise per month and since January 2013 the prices have risen by more than Rs 8.

Additionally a subsidy of Rs 0.82 per litre on PDS kerosene and Rs 22.58 per cylinder has been provided by the government. The three firms during the previous year 2012-13 has lost Rs 1,61,029 crore as subsidy. Subsidy have fiscal affects since the large part of the subsidies emanate from the budget. They increase the fiscal deficit. Due to high subsidy the fiscal deficit remained a headache for the government of India. The current fiscal deficit stands at 4.8% of gross domestic product (GDP) for the fiscal year 2013-14.

Due to shortfall in domestic oil exploration India imports around 70% of its oil demand from the international market. The government of India does not pass on a major of the increase in the price of oil to the end consumers and thus subsidies diesel, LPG and kerosene. The current account deficit (CAD) for the first half stood at USD 26.9 billion (3.1%) for the fiscal year 2013-14.

Although the CAD has reached its 60% (USD 26.9 billion) of its expected CAD of USD 45 billion till the first half of the financial year 2013-14, we feel it will not exceed the targeted CAD for the financial year 2013-14. The main reason for the same is appreciating rupee. The rupee is currently trading at 61.06 (on March 21, 2014) per dollar.