Diesel loss wiped out: What will FY15 subsidy look like?

Moneycontrol BureauWith oil-marketing companies starting to make profits on sale of diesel for the first time in 12 years, thanks to the January 2013 decision to increase prices of the fuel by 50 paise every month till losses were wiped out, the government faces a bright financial picture on the subsidy front.Diesel prices have gone up from about Rs 47 per litre in January 2013 to nearly Rs 58 currently. At the same time, international crude prices, which were hovering at around USD 108 back then, to about USD 95 lately following weakening of global oil demand and increasing supply.This bodes well for the government’s fuel subsidy picture. The Indian government subsidizes part of the cost of fuels such as LPG, kerosene and diesel by asking retailers to sell below cost.In FY14, total under-recovery (or losses arising out of sale) for oil marketing companies stood at about Rs 1.4 lakh crore (diesel accounted for 45 percent of this, or roughly Rs 63,000 crore). As per a subsidy sharing formula devised by the government with respect to under-recoveries, it paid about Rs 77,000 crore while the remaining was largely assumed by profit-making upstream oil exploration companies such as ONGC.However, given that losses on diesel have already been wiped out and crude has come off steadily in the past few months, experts believe the total subsidy on diesel for the full year could reduce drastically.For FY15, the government has forecast fuel subsidies to stand at about Rs 63,426 crore.In a recent report, Deutsche Bank said that for every USD 10 per barrel fall in crude oil price, fuel subsidy could reduce by USD 4.5 billion, or Rs 27,000 crore.Thus, if crude happens to average USD 100 per barrel in FY15, it could result in fuel subsidy coming in at less than Rs 50,000 crore.“If global oil prices sustain at current levels, we estimate oil subsidies to fall by 44 percent YoY in FY15 - the sharpest fall in any one year since FY10,” the Deutsche report said.- Posted by Nazim Khan