News Hour: Rising oil prices to leave government fiscally challenged

India is once again staring at a dangerous concoction of a weak rupee and high international oil prices that could delay any meaningful fiscal consolidation process. The central government's tax income from the sector has declined, but the subsidy burden continues to remain high. India's petroleum sector alone reported an under-recovery of Rs 85,586 crore — around 60% to be financed by the central government — for the first six months of the current fiscal, as global oil prices stayed firm and rupee remained weak. 
Hopes for a turnaround had flared when the government took steps in September to rein in the sector's losses, accompanied with the rupee's appreciation above 52 against the US dollar and stagnation in global crude oil prices. However, things have once again worsened over the past two months. From the peak above 52 against the US dollar at end-September, the rupee has steadily fallen to below 55 at present. 
Meanwhile, crude oil prices have spiked following the unrest between Israel and Palestine. As a result, India's cost of importing a barrel of oil has moved above Rs 6,000 after a gap of two months. Under-recoveries reported by the three state run oil marketing companies (OMCs) have gone down from Rs 551 crore per day in the first fortnight of September 2012 to Rs 412 crore per day in the second fortnight of November. 
However, the average for the current quarter so far still remains at par with the July-September quarter. This means the sector's under-recovery should remain around Rs 37,000 crore in the October-December quarter in line with Rs 37,775 crore of the second quarter. It is no secret that the government is finding it difficult to compensate OMCs. For the first half of FY13, the government agreed to pay just 35% of the Rs 85,586 crore under-recovery. 
This was much lower than the typical 60% it had paid in the earlier years. Factors such as delayed divestment process due to weak capital markets and poor receipts from the recent 2G auction are compounding the problems. At a time when the industry's under-recoveries are growing, reduction of taxes has brought down the central government's income from the sector. In June 2011, the government had cut customs duty on crude oil and products and excise duty on diesel, which was restored only in September 2012. 

KEY POINTS 
India's petroleum sector alone reported an under-recovery of Rs 85,586 crore. From the peak above 52 against the US dollar at end-Sept the rupee has fallen to below 55 at present. For the first half of FY13, the government agreed to pay just 35% of the Rs 85,586 crore under-recovery India's growing petroleum consumption but stagnating production means the imports are rising. 

(source: economictimes.indiatimes.com)