Diesel and petrol gas pumps stand at a gas station in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Union Budget 2018: Petroleum Subsidy Allocation May Fall Short. Here’s Why.

The government’s almost unchanged petroleum subsidy allocation for the next financial year may fall short as crude oil prices are expected to rise.

Brent Crude, the Asian benchmark for oil prices, is now hovering around $70 a barrel, having risen more than 30 percent in six months. Through 2018-19, average crude price is expected to be 16 percent higher compared with this year, according to data compiled by BloombergQuint.

As a result, an average of 11 brokerage reports on the Budget expected the petroleum subsidy to be around to Rs 33,500 crore, Rs 8,500 crore more than the actual outlay. The government set aside Rs 24,933 crore—Rs 20,377.8 crore for liquefied petroleum gas and Rs 4,555 crore for kerosene—for the next financial year compared with Rs 24,460 crore in 2017-18. Petroleum and diesel prices are now linked to market rates.

Union Budget 2018: Petroleum Subsidy Allocation May Fall Short. Here’s Why.

What The Government Can Do

Revise Estimates

It can increase the budgeted estimates for subsidy if there is a shortfall, as pointed out by brokerages.

“Oil subsidy—unchanged between FY18 and FY19—could be at risk of slippage if oil stays high,” according to a Citi Research report. Motilal Oswal said the subsidy amount estimates Brent crude prices at $51 a barrel. “If prices sustain at current levels, there could be a shortfall.”

Sharing The Burden

As the budgeted estimates are expected to fall short, explorers like Oil and Natural Gas Corporation Ltd. and Oil India Ltd. could be called upon to fill the gap. That will not be new as upstream companies used to share the subsidy burden with the government till the quarter ended September 2015.

A shortfall in subsidy increases the earning risk for upstream companies if they were to share the burden, Morgan Stanley said. Their net realisations could be capped given the rise in oil prices, it said.

Union Budget 2018: Petroleum Subsidy Allocation May Fall Short. Here’s Why.

Possible Price Hikes

The government has been increasing the prices of only subsidised fuels to reduce the subsidy burden. LPG and kerosene are now 12.5 percent and 25 percent, costlier, respectively, compared with April last year. A lower-than-expected subsidy allocation for 2018-19 suggests price hikes.

Price action across the fuels broadly supports the subsidy assumption for 2018-19, JPMorgan said. The brokerage doesn’t expect oil explorers to share the subsidy burden.

Union Budget 2018: Petroleum Subsidy Allocation May Fall Short. Here’s Why.