If the Finance Minister is losing sleep over mounting under-recoveries, the public sector oil companies may possibly be having nightmares. With good reason. Under-recoveries on the sale of price-controlled fuels for FY-12 have shot through the roof (Rs 97,313 crore up to December 2011) and are expected to be the highest ever for the full fiscal (in excess of Rs 130,000 crore). The last time the under-recovery bill exceeded Rs 100,000 crore was in FY-09, when the price of crude oil (Brent) touched $145 a barrel before crashing to below $40 levels due to the global recession. That year, the cost of the Indian crude oil basket averaged around $84 per barrel. In the current fiscal, this has increased to $110 a barrel and is showing no signs of moderating. It also does not help that the rupee has been on a weak wicket for much of this fiscal, thereby increasing the rupee cost of the imported crude oil.
The massive under-recoveries this fiscal are despite the petrol price deregulation in June 2010. Since then, there has been a series of price hikes on petrol while the prices of diesel, PDS kerosene and domestic LPG have been raised rather infrequently. In effect, no under-recovery on petrol has been accounted for in FY-12. In reality though, the oil marketing companies (Indian Oil, BPCL and HPCL) still provide some subsidy on the fuel since the government's tacit nod for raising petrol prices has not always been forthcoming.
Under-recovery on diesel
Also, the price gap between petrol and diesel has been increasing steadily from around Rs 11 in June 2010 to almost Rs 25 currently. This has led to a marked preference for diesel vehicles, and contributed to under-recovery from diesel sales ballooning. From around Rs 34,700 crore in FY-11, diesel under-recovery has increased to more than Rs 56,700 crore in the first nine months of FY-12. According to the Petroleum Planning and Analysis Cell, the current under-recovery on diesel is Rs 11.35 per litre, while that on PDS kerosene and Domestic LPG are Rs 28.77 per litre and Rs 378 per cylinder respectively. At these levels, daily under-recovery for the oil marketing companies stands at Rs 470 crore.
Govt must do a balancing act
The under-recovery burden is usually shared among the oil marketing companies, the upstream companies and the government. However, deteriorating financials of the oil marketing companies and the government restrict their ability to foot the rising bill. This has led to the recent increase in the subsidy share of the upstream companies (ONGC and Oil India) and GAIL from one-third to almost 38 per cent. Other fire-fighting measures such as imposition of special taxes on diesel vehicles and a hike in the price of diesel cannot be ruled out. The latter step though carries the risk of stoking inflation, which is only now showing some signs of moderation. The government clearly has a tight balancing act to perform.