Oil, power subsidies: 'government will have to bear Rs 8-10 billion additional burden monthly'

Government will have to bear an additional burden of Rs 8-10 billion per month on account of oil and power subsidies, at a time when fiscal deficit is breaching all records, analysts said. According to them the government is avoiding any rise in local oil prices and electricity rates due to political reasons.
"We believe the cash-starved government would face serious repercussions given the fact that international oil prices are continuously on the rise," Farhan Mahmood, senior analyst at Topline Securities said. Till January 2011, Saudi light crude, which is a benchmark for local E&P companies and refineries, has increased by 8 percent to $96 a barrel.
"This is alarming in the sense that if it is not passed on to the consumers via oil products and electricity tariffs the government will have to bear Rs 8-10 billion a month," Farhan observed. He said with no major external inflows expected, the government this year again will rely on local borrowing to bridge the likely fiscal gap of 6-7 percent of GDP (Rs 1.0-1.2 trillion).
The recent quantitative easing by US and one of the worst winters in Europe, have contributed to increase in WTI crude oil prices since beginning of this year to $91 a barrel. What is more important is the fact that Arab Light crude price, a benchmark for local E&P companies and refineries, has reached $96 a barrel. Similarly, oil products' prices including petrol and diesel also increased by $6.5-7.0 a barrel (Rs 3.5-4.5 per litre) in the international markets.
Thus, if this trend continues, the month-end oil price meeting of Ogra would be crucial which will decide local oil product prices for the month of February 2011, Farhan said. "If government maintains oil product prices at retail level, the government will have to forgo its Petroleum Levy (PL), a tax currently levied on oil products, which is Rs 4.4 per litre on petrol and diesel," he said. This will give the government a hit of Rs 4.5-5 billion a month only from oil products, he said adding that subsidy on electricity could also increase by Rs 4 billion a month.
Currently, the government is providing a monthly subsidy of Rs 2.8-3.0 per kilowatt-hour (kwh) ie Rs 20-21 billion a month. If the electricity rates are not increased every month, it could be difficult for the government to cope with huge subsidies, Farhan said.
Since the government is relying more on furnace oil-based power generation due to non-availability of gas and hydel generation, a four percent rise in international FO prices will increase power cost by Rs 0.5/kwh. Thus, the government will take a hit of Rs 3.5-4.5 billion a month. The impact could vary depending upon the availability of gas and hydel power, he added.