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Sunday, March 10, 2013

Budget aftershocks: Brace for a series of fuel price hikes in coming fiscal year


Budget aftershocks: Brace for a series of fuel price hikes in coming fiscal year



Consumers may well have to pay the price for the finance minister's bold move to insulate the Budget from volatility in the global crude oil prices by capping subsidies.
Consumers may well have to pay the price for the finance minister's bold move to insulate the Budget from volatility in the global crude oil prices by capping subsidies.
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Hugo Chavez's death in Venezuela or the strident noises by MahmoudAhmadinejad in Iran should be of little interest unless you are tracking global geopolitics closely, right? Wrong. Every such development, which will ensure that crude oil prices are never as still as a photograph, has the potential to tear into your monthly finances. 

Combine that with the finance minister's resolve in the recent Union Budget to keep an eagle eye on thesubsidy bill, and you have little choice but to brace for a series of fuel price hikes in the coming fiscal year. In one of the boldest steps in recent times, P Chidambaram has insulated the Budget from the volatility in the global crude oil market by capping subsidies.

Back-of-the-envelope calculations suggest a minimum Rs 6 hike in diesel prices by March 2014, coupled with modest increases in the price of cooking fuel, bothLPG and kerosene.

Or a spurt of Rs 13 per litre in diesel by the end of fiscal year 2014, with cooking fuel prices remaining unchanged. Clearly, the government has gambled on crude oil prices remaining soft — Brent Crude stood at $111 per barrel at the time of writing — and all other variables remaining constant.

Raghuram Rajan, chief economic adviser to the finance ministry, told ET that the government has minimised its risks by immunising itself from the volatility in crude oil prices. Quoting earlier reports of Kaushik Basu, his predecessor, and Kirit Parikh, former member (energy) of the Planning Commission, he said: "We have to cap the subsidy bill at a realistic level."

That may go some way in helping the FM stick to his promise of trimming the deficit, but consumers will have to bear some of that pain, at least in the short to medium term.

Consumers may well have to pay the price for the finance minister's bold move to insulate the Budget from volatility in the global crude oil prices by capping subsidies.
Here's why: Budget 2013 caps fuel subsidy at Rs 65,000 crore for the coming fiscal year against the revised estimate of Rs 96,880 crore for 2012-13. The math for slashing the fuel subsidy bill looks formidable at this point.

Assuming that global crude oil prices remain unchanged — a remote possibility — demand stops growing and the rupee remains at status quo vis-a-vis the dollar (around Rs 55), diesel prices will still be on the up over the next 12 months.

The money provided for in the Budget will barely meet the subsidy bill for keroseneand cooking gas, leaving no dole for diesel. But there is a rider on diesel pricing, too. Oil companies may be left to choose between a rock and a hard place, as the government has allowed a price hike of only 50 paise a litre every month.

This would help oil companies bridge only half the gap between market prices and pump prices even if consumers end up shelling out an additional Rs 6 a litre for diesel by the end of fiscal year 2014. The government has gambled on the global market while capping fuel subsidies at just 65% of the earlier bill.

It is betting on higher gas production in the US and lower demand from contracting economies to keep oil prices low. However, there are enough spoilers to undo any such math. The political instability in West Asia or a boom in commodity markets could easily play spoilsport.

Rough calculations reveal that kerosene subsidies will hover around Rs 33,000 crore while cooking gas subsidies would cost a neat Rs 40,000 crore at current prices. The two alone would add up to Rs 73,000 crore! This would leave the oil companies with little choice but hike diesel prices to market rates. But that may not be easy, given the high inflationary trends and the political climate.

A steep hike in diesel prices can only be avoided if the government allows oil companies to hike prices of kerosene and LPG in small doses so that some subsidies can be left aside for diesel.

This option, however, looks politically unviable. Burdened with high food prices, the government will tread carefully when it comes to inflation management, what with a general election not too far away. Perhaps the most plausible option would be to fall back on the oil producing companies, like ONGCBSE 1.77 % and OIL, who will need to sell crude oil at discounted prices, a variation of subsidy sharing.

So, while the Budget will provide for the bulk of the subsidies on cooking fuel, that on diesel will have to be given by the cash-rich cousins of the refining and marketing companies.


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