Oil subsidy may triple to 2.2 per cent of GDP
In 2008 when GDP is slated to grow to $1.34 trillion, the subsidy may jump to $18.1 billion at $100 a barrel crude price, and to $23.4 billion at $115. Oil: Why so high?
By PTI |
NEW DELHI: India's oil subsidy may shoot up three times to 2.2 per cent of the GDP this year even as the government dithers on raising fuel prices in step with the rise in input (crude oil) cost.
The country paid $8.7 billion in oil subsidies in 2007 or 0.7 per cent of the GDP.
In 2008 when GDP is slated to grow to $1.34 trillion, the subsidy may jump to $18.1 billion at $100 a barrel crude price, and to $23.4 billion at $115. At current market price, it would rise to $29.2 billion, Credit Suisse said in its latest report on subsidies in Asia.
State-run fuel retailers Indian Oil, Bharat Petroleum and Hindustan Petroleum face a revenue loss of Rs 225,040 crore on sale of petrol, diesel, domestic LPG and kerosene this fiscal on not being allowed to align retail prices with cost.
The country paid $8.7 billion in oil subsidies in 2007 or 0.7 per cent of the GDP.
In 2008 when GDP is slated to grow to $1.34 trillion, the subsidy may jump to $18.1 billion at $100 a barrel crude price, and to $23.4 billion at $115. At current market price, it would rise to $29.2 billion, Credit Suisse said in its latest report on subsidies in Asia.
State-run fuel retailers Indian Oil, Bharat Petroleum and Hindustan Petroleum face a revenue loss of Rs 225,040 crore on sale of petrol, diesel, domestic LPG and kerosene this fiscal on not being allowed to align retail prices with cost.
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BPCL and HPCL would run out of cash to even import crude oil in July while IOC can sustain imports till September. Yet, even after several rounds of consultations at the level of Prime Minister Manmohan Singh and UPA Chairperson Sonia Gandhi, no decision has been taken on either raising retail prices and/or cutting duties.
"India with a high net import content, is in greater need for price hikes," Credit Suisse said pointing that the country imported 75 per cent of its oil needs.
On the other hand, China, which imports 52 per cent of its oil needs, is continuing price caps and yet would see subsidies rising to only 0.3-0.8 per cent of the GDP.
India marginally subsidises LPG and kerosene from the Budget and meets less than half of the revenue loss on fuel sales through issue of oil bonds. It issued IOC, BPCL and HPCL oil bonds worth Rs 35,290 crore in 2007-08 fiscal.
Credit Suisse said with General Elections slated for May 2009, "any action from the government is likely to be limited."
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"The recent reverses suffered by the ruling Congress party in provincial Assembly elections (in Karnataka) are also expected to underpin the government's willingness to take drastic measures," it said. IOC, BPCL and HPCL, at present, are losing Rs 16.34 a litre on petrol, Rs 23.49 per litre on diesel, Rs 305.90 per LPG cylinder and Rs 28.72 per litre on kerosene.
A one rupee hike in petrol and diesel price would give Rs 1,036 crore and Rs 4,575 crore additional revenues on the two fuels respectively during the remaining 10 months of the fiscal. The Rs 20 hike in LPG prices would yield Rs 1,200-1,300 crore.
Government has used oil bonds to fund the increasing deficit of the oil account.
"At current oil prices, the total bond issuance could be close to $25 billion (compared to $9 billion for 2007). With another $15 billion likely for food and fertilizer subsidies, the total subsidy bill would be large in the context of overall GDP (4 per cent of GDP)," it said.
Price caps and subsidies distort demand by boosting consumption for oil in markets with price caps by keeping the price signal away from the consumer and skewing demand growth in favour of products with price caps.
"In the US, for example, high prices are forcing a decline in miles driven," Credit Suisse said. "Demand outside of China, India and the Middle East decline in first quarter of 2008, and that trend is likely to accelerate through the year as high oil prices take their toll."
Power shortages and inexpensive diesel in India has pushed up demand for diesel generating sets. In addition, with the gap between fuel oil and diesel narrowing, there is now enough incentive for local fuel oil users to use diesel - the small premium for diesel is compensated for by lower maintenance costs, given the higher quality of the fuel.
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"Oil subsidies have essentially meant that domestic prices in China and India have remained largely unchanged in a period when domestic income growth has been strong," Credit Suisse said. Falling oil as a percentage of disposal income in these markets is in direct contrast to the US, where oil as a percentage of disposal income is up to nearly 4.5 per cent -- the same level in 1979. This artificially inflates both fleet growth and the mileage driven by the fleet.
Globally, oil demand is falling across most free pricing regime, with price-capped regions like India and China contributing inordinately to growth.
"Within India and China, demand for products with free pricing (naphtha and fuel oil) has slowed dramatically, and even declined. Paradoxically, efforts to shield customers from the oil shock could be sending oil prices higher," Credit Suisse said.
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