Is Pranab's optimistic fuel subsidy plan a pipe dream?

Despite the finance minister’s assurances on keeping subsidies in check in 2012-13, the fuel factor could throw most of these calculations off gear, economists reckon. Some assumptions say, assuming crude averages around $125 a barrel this year, going forward, gross under-recoveries for the oil marketing companies could well hit Rs 1,62,000 crore in FY13, causing serious problems for Pranab Mukherjee’s calculations.

A post-Budget report by Citi says that despite the Budget proposal to bring subsidies down, they remain a key worry, and the minister’s assumptions are ‘optimistic’ primarily due to slippage on fuel subsidies. Subsidies are projected to see a 12.2 percent contraction in order to meet the non-plan spending targets. “Unless painful price increases are implemented (which are likely to be difficult given political compulsions); these targets may be difficult to meet,” says Rohini Malkani of Citi in the report.

The budget factors in oil subsidies at Rs 43,600 crore. This incorporates deferred oil subsides from FY12, to the tune of Rs 25,000 crore. The Rs 1,62,000 crore gross under-recoveries figure, estimated by Citi analyst Saurabh Handa, assumes some price hikes by the government - diesel prices being raised by Rs 5 a litre, LPG by Rs 70 and kerosene by Rs 2. “While there is little clarity on the subsidy sharing formula, assuming the government shares about 45 percent of the total, the subsidy bill could rise to Rs 73,100 crore in FY13,” Citi’s analysis says.

Analysts feel taking into account the FY12 deferred oil subsides, the Rs43,600 crore figure outlay projected for FY13 is conservative. “A caveat to this could be the budget proposal to restrict subsidies to 2 percent of GDP in FY13 where-in it has said it would fully provide for food subsidies while the others would be funded to the extent that they can be borne by the economy without any adverse implications,” Citi says. But the key point to note is whether the fuel price hikes can be undertaken without further damage to the government’s political credibility, read Mamata Banerjee’s strident opposition to anything remotely connected to raising prices.

Oil companies are making major losses on diesel and cooking fuels, despite the fact that de-regulation of petrol subsidies last year helped ease the burden a little. Current losses on diesel are Rs13 a litre, LPG Rs326/cylinder and kerosene Rs28.5 a litre.