Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Budget 2012 Expects To Cut Petrol Subsidy 35%

Apparently, in this budget, we are going to cut the petroleum subsidy by a mind-boggling 35%. By nearly 25,000 crores (Rs. 250 billion *) From the budget document:


If you’re wondering where the “reduction” will come from, here’s the official explanation

Decrease is mainly due to higher petroleum subsidy paid to
OMCs in 2011-12.

Ah, really! That is so satisfying as an answer. We gave more this year! So we’ll give less next year!

We allocated Rs. 68,000 cr. (680 bn) for oil subsidy this year. Extrapolating from December’s figure of oil under recovery of Rs. 97,000 cr. and then that the companies were losing about Rs. 400 cr. per day, the oil pool deficit should be 130,000 cr. (1.3 trillion) by March.

At Rs. 400 cr. per day – assuming crude prices are constant and diesel prices aren’t increased locally – we will easily see another Rs. 130,000 cr. (1.3 trn) next year. If crude prices go up, the figure will be higher. We will have to provide for at least the same amount – or if we don’t want to kill the refiners’ credibility, even more.

I hope the budget makers haven’t been inhaling those petrol fumes.

(* I’m trying to convert crores to billions or millions for international readers. Kindly excuse.)

  • Dheeraj says:

    I’d commented earller today. Looks like it got lost in cyberspace.
    You don’t really need to extrapolate to get the oil deficit. Just double the subsidy number, since the government bears one half of the deficit. One third is borne by upstream companies – ONGC, GAIL OIL etc. The remaining is absorbed by the retailers.
    By this rule, the oil deficit is 137000 crores approx.

    • Interesting – didn’t know about the retailers but at some point, absorbing Rs. 30,000 cr. will be a problem for them I think. That also means next year, if we go at this rate, the chances that the oil subsidy is ONLY 44,000 cr. is next to nil? Of course we can increase fuel prices, but then oil prices also are likely to go up…

      • Dheeraj says:

        By ‘absorbed by retailers’ I meant the under-recovery by oil marketing companies viz IOC, BPCL and HPCL.
        Yes, the only thing that can bring the situation under control – unless they raise prices soon – is that crude oil prices fall sharply. Our government’s reaction seems to be to ‘pray’ for crude prices to fall.
        Given that we also have general elections scheduled next year, raising prices would require gumption that we havent seen from the folks that govern us nowadays.
        It’s a mess overall, and all we seem to be doing is digging ourselves into a deeper hole.
        This pricing sheet (as of March 1st week) gives us a clue to the extent of the hole.

  • Kshitij says:

    I am no expert on the bond market but does this mean that either way the bond market crashes. If fuel price goes up, inflation is up. If subsidy stays, the govt borrows more?

    • Govt will borrow more, regardless of what they say right now. I doubt we grow tax revenue by about 20% (this year was only 7%) and we’re not even sure people will bid 40,000 cr. for that 2G spectrum anymore. It’s going to be a fun year.