Oil prices 8212; Tough task ahead for Govt

MUMBAI, FEB 29: Caught flat-footed by the world oil market's sprint to 30 a barrel crude, India faces the tough task of asking its poor a...

MUMBAI, FEB 29: Caught flat-footed by the world oil market8217;s sprint to 30 a barrel crude, India faces the tough task of asking its poor and middle classes to pay more for petroleum products such as kerosene and liquefied petroleum gas to whittle down a stubbornly high subsidy bill.

The environmental costs cannot be counted, but the black exhaust fumes from use of adulterated fuel make Indian cities among the most polluted in the world. The decision to trim subsidies and hike prices could take two more weeks as India8217;s Bharatiya Janata Party government convinces coalition partners to let fiscal reality overrule political sensitivities.

Other moves to privatise and deregulate the mostly state-owned oil sector however seem likely as India announces its annual budget for 2000/2001 April-March on Tuesday and addresses the worsening fiscal position.

Choices limited: The Oil Pool Account deficit equates to around eight percent of India8217;s 18 billion budgeted federal government fiscal deficit, but has traditionally been kept aside from fiscal calculations.

India has for years kept prices of kerosene and LPG low, funded by higher charges on petrol, aviation fuel and diesel. Three years ago, the government was forced to take the high deficit generated by this cross-subsidy onto its books and issue bonds in lieu of payments to oil companies.

The slump in global prices to 22-year lows below 10 a barrel in 1998 gave the Oil Coordination Committee OCC the opportunity to redeem most of the bonds and settle dues. At the end of January, bonds worth just 3.85 billion rupees were outstanding of the total 129.8 billion issued.

But crude prices have now hit nine-year highs and on Monday were above 27 a barrel. Oil imports, which account for more than a fifth of India8217;s imports, could end up double the original estimates of 6.02 billion for 1999/2000.

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Profit margins on aviation fuel and diesel have shrunk. Prices of diesel, meant to be related to import prices, have remained constant since a 40 percent hike in October.

Aviation fuel is close to import prices and the OCC gains only on petrol which it sells at twice its import cost. The last major hike in kerosene prices was in 1985 and LPG sells at 50 per cent discount to import costs. If the government does not hike prices of some products now, it will be forced to bail out the oil pool one again, which given its fiscal position, it can ill-afford.

Low inflation, with the wholesale price index just around 3 per cent, makes the timing for a hike perfect. Alternately, the government could cut import duties and local excise duties, but that would hit revenues.

quot;..we would lay a greater importance on an increase in LPG/kerosene prices, which would mean a concrete step towards deregulation, rather than positive changes in import duties,quot; HSBC Securities said in its monthly Oil and Gas report.