Straitjacket

Crude oil prices are back above the pain threshold, with Iran threatening to block the Strait of Hormuz in retaliation for pressure from western countries over its nuclear programme. One-fifth of the oil consumed globally passes through the strait, which is just 50 km at its narrowest point. On February 24, Brent crude crossed$124 a barrel. This is enough to give most countries a headache, but for India, where oil accounts for two-thirds of the import bill, the pain will be worse.

In the 2011 Budget, Finance Minister Pranab Mukherjee estimated that the average price of the Indian crude basket would be around$95 per barrel. But the reality has turned out worse, at $108. The Finance Ministry has already compensated oil marketing companies (OMCs) such as IndianOil, Bharat Petroleum and Hindustan Petroleum with a`50,000 crore subsidy. But underrecovery by these companies on the sale of diesel, kerosene and liquefied petroleum gas has already crossed `1 trillion (a trillion equals 100,000 crore). Petroleum Minister S. Jaipal Reddy is pushing for more assistance from the Finance Ministry, but sources say it is unlikely to happen. “I have asked the Finance Minister to help OMCs with losses on petrol, but I have not got any assurance,”says Reddy. Now crude prices could derail the Finance Ministry’s plans.

India consumes some three million barrels of oil daily, of which about 80 per cent is imported. More expensive oil would fuel another round of inflation and slow growth. In the last quarter, the GDP growth rate was at 6.9 per cent. “Oil prices are a big factor in inflation management, and for the fiscal deficit and macroeconomic stability,”says Reserve Bank of India Governor D. Subbarao.

The Finance Ministry is casting about for ways to fund education and food security programmes, but unfortunately, there seems to be no end in sight to the Iran row right now. Even raising money by divesting stakes in public sector units is not an option – poor market conditions ensured that the government could only raise `1,145 crore in this way, compared to a disinvestment target of`40,000 crore.

Anis Chakravarty, Economist at Deloitte Haskins & Sells, says:“There is no way the government can accomplish its target of lowering the fiscal deficit to 4.6 per cent. Our estimate is that they would be able to reach 5.5 per cent.” He adds that the government needs to look for ways to stabilise India’s dependence on imported energy resources, and to reduce the subsidy burden.

OMCs are seeking succour and may get“forced” discounts from upstream companies such as GAIL, Oil India Ltd and ONGC, as they have before. “We haven’t yet worked out the subsidy-sharing formula, but will do it soon,” says a senior Petroleum Ministry official. “Right now we are asking finance ministry to help us.” In the first week of March, after polling for the seventh round of elections ends in Uttar Pradesh, the boards of the three public sector OMCs are scheduled to meet to raise petrol prices.