Oil price dip to save govt Rs50,000 cr in subsidies: Crisil

The recent decline in crude oil prices would help the government to cut fiscal deficit by Rs40,000-50,000 crore, according to estimates by ratings agency Crisil.

"The recent plunge in oil prices is positive for India as it will lead to lower under-recoveries (by oil marketing companies) and also reduce the import bill," it said in a paper released in Coimbatore today.

According to analysts, a continued drop in commodity prices, mainly those of oil and gold, could also help lower India's current account deficit to around 3 per cent of its gross domestic product (GDP) in the current fiscal.

Overall under-recoveries, the difference between the purchase price of crude oil and the retail price at which petroleum products are sold, are expected to come down by half to Rs70,000-80,000 crore in 2013-14. The under-recoveries are estimated to be Rs1.5-1.6 lakh crore in 2012-13.

The under-recovery in diesel, which accounted for 45 per cent of the fuel consumption in 2012-13, was as high as Rs11 per litre in February 2013. It is estimated to have fallen to a mere Re1-Rs2 per litre on 16 April. The decline in under-recoveries would lower the working capital requirements of oil marketing companies (OMCs).

"This would lead to an improvement in their profitability and liquidity position, led by better cash flows and lower reliance on short-term loans to fund working capital requirements," Crisil said.

"We expect OMCs' interest cost to decrease by Rs2,500-3,000 crore) in 2013-14, which is close to half of their net profit in 2011-12," it said.

Profitability of upstream oil companies such as the state-owned Oil & Natural Gas Corp (ONGC) and Oil India Ltd (OIL) would also improve significantly as their share in under-recoveries would decline to Rs25,000-30,000 crore in 2013-14 compared to an estimated Rs50,000-60,000 crore in 2012-13.

The government's share in under-recoveries is likely to dip by Rs40,000-50,000 crore in 2013-14 from an estimated Rs80,000-90,000 crore in 2012-13.

"This would lower the fiscal deficit and thus help improve the government's financial position," Crisil said.

India's fiscal deficit during April-February 2012-13 rose to Rs5,07,000 crore ($93.23 billion), or 97.4 per cent of the budgeted full fiscal year 2012-13 target, from 94.6 per cent during the same period of the previous fiscal.

Total expenditure stood at Rs12,20,000 crore during April-February 2012-13 against net tax receipts of 5,70,000 crore during the period.

The government had, last month, projected a fiscal deficit of 5.2 per cent of gross domestic product (GDP) for the fiscal that ended on 31 March 2013.

The spike in India's current account deficit has mainly been due to high prices of crude petroleum and precious metals like gold and silver. In fact, oil and gold accounted for more than half of the country's import bill.