The numbers tell the story. The three government-owned oil marketing companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, together meet the entire domestic demand for diesel, kerosene and domestic cooking gas at government-dictated prices. In the current fiscal, under recoveries will gobble up an estimated at Rs 1.4 lakh crore and the yawning gulf threatens to hurt the government and the common man alike.

The government seems to be looking down the barrel with a Rs 2.13 lakh-crore revenue loss looming large given the current levels of global crude oil prices and domestic retail prices of subsidised products. Witholding of diesel, LPG and kerosene prices, steep crude oil prices and a weak rupee may combine to nix Finance Minister Pranab Mukherjee's subsidy-reduction plans. Mukherjee has provided Rs 40,000 crore towards compensating oil marketing companies for losses on the three controlled products next year but the companies see their under-recoveries hitting an all-time high of Rs 2.13 lakh crore if prices are not raised and crude oil remains around $125 a barrel. For 2012-13, a finance ministry official told newspersons, an average price of $120 a barrel for crude oil had been assumed while making the Budget calculations. 

Oil companies started making rebellious noises soon after the budget was presented and fuel price hike appears imminent. “The Budget provides little scope for meeting the under-recoveries of oil marketing companies. Even if the current formula is continued for the next fiscal, the government’s share of Rs 1.32 lakh crore at 62.1 per cent of Rs 2.13 lakh crore will be much higher than provided in the Budget. It is not a good Budget for us,” said P K Goyal, director (finance), Indian Oil Corporation. In the current fiscal, the government outgo on all subsidies (petroleum, food and fertilisers) is calculated at 2.34 per cent of GDP. Goyal said the situation was worrying, as the government’s fiscal deficit had touched 5.9 per cent of GDP against the target of 4.6 per cent. Under the current subsidy mechanism, 37.9 per cent under-recoveries on three petroleum products is shouldered by the government-controlled upstream oil and gas producing companies, ONGC, OIL and GAIL, in the form of discounts on their sales to oil marketing companies. The rest is supposed to come from the government.

Global market conditions do not send out encouraging signals with the Iran standoff choking prospects further and it would be obvious that Pranab Mukherjee must be a worried man today. Even if retail prices were to be revised in April, it is practically impossible for the government to allow a rise that meets the full under-recovery on the products, though it may bring down the overall subsidy burden. This is a déjà vu moment given that the mismatch is nothing new, however procrastinating over decades has widened the gulf to ridiculous lengths and any chopping and cutting now will upset the delicate balance. The government has been under-providing for petroleum subsidy at the Budget stage for several years. This has resulted in the revised and actual outgo increasing many times by the year-end. For instance, Budget 2011-12 provided Rs 20,000 crore for meeting under-recoveries but the revised estimates presented last week pegged it at more than three times, around Rs 65,000 crore.

This is a difficult time both politically and economically, let me first explain to you that what were my primary concerns. The primary concerns were how to bring back economy to the path of higher growth because unfortunately I would say when I assumed the responsibility of the Finance Ministry after a quarter century that was one of the most difficult year because first major international financial crisis brought down in 2008, therefore in that context I had to present the interim budget and full budget naturally the growth came down, fiscal deficit increased and next 2 years I took to consolidate, first to bring it back to higher growth trajectory and fiscal deficit wise.

Call it confidence, bravado or just posturing but post-budget Finance Minister Pranab Mukherjee went on record to say that his government would overcome the crisis in the downstream fuel market despite all odds. In the customary post-Budget interaction with business chambers, Mr. Mukherjee also expressed hope that the Reserve Bank would reverse its monetary tightening in the coming months as core inflation came down, boosting sagging industrial sentiments. As the Budget came over a week after the dismal performance of the Congress in the Assembly polls, the finance minister was candid enough to admit that he was “extra-careful” because of political compulsions. “I am confident we shall keep subsidies below two per cent of GDP in the next fiscal and reduce it to 1.75 per cent over the next three years,” he said. Chief economic advisor Kaushik Basu said, “We are very serious about the fiscal deficit target; 5.1 per cent is a very credible target.”

Mukherjee further said, “I am not making a tall claim by pegging growth at 7.6 per cent for the next fiscal.” Assuring the industry that the government is serious about expeditious clearance of projects, the finance minister said, “Currently, we are addressing mega power projects, coal linkage and environmental clearances — all three taken together.”

“Prime Minister has already stated that these are the areas where executive actions are called for, for instance petrol is already deregulated. Diesel, kerosene, LPG are not fully deregulated, petrol has been deregulated in last June, decision has been taken that it has to be implemented, that's why what I want that I have indicated in my Budget speech that these are the objectives you shall have to reach, these are the targets we shall have to reach”, Mukherjee said in response to a question.

Asked about the Goods and Services Tax and Direct Taxes Code, the finance minister said the law for DTC would be introduced this financial year so that the Income Tax Act could be replaced from April 1, 2013. On GST, he said work on a model GST law was on, while the standing committee of Parliament was yet to give its report on the constitutional amendment Bill to roll out GST.

Even as there is a debate over diesel decontrol, petrol prices are not fully out of the administrative control mechanism. Even when global prices rise, there is no mechanism to pass on the burden to domestic customers. As such, subsidies of the government increase for oil marketing companies as they go for losses. Part of the contribution is also made by upstream oil companies. Also, Rs 42,000 crore from telecom spectrum sale, and Rs 30,000 crore from disinvestment may depend on factors outside government control. Tax buoyancy would also be there when the economy grows by 7.6 per cent, as estimated in the Budget, economists said.

Reassurances cannot change realities, say market pundits. If Mukherjee does not read the writing on the wall the market gurus see it in bold capitals. Skepticism was the flavor of the month with most analysts refusing to swallow the projections shown by the government.
Slippages in direct tax collections by Rs 32,000 crore over the Budget estimates in 2011-12, missing the disinvestment target by almost Rs 26,000 crore and ballooning of subsidies by Rs 1.73 lakh crore are bound to push up the fiscal deficit to 5.9 per cent of GDP, against 4.6 per cent pegged in the Budget estimates, says an analyst. Economists at credit rating agencies said the deficit target would most likely overshoot by 20-40 basis points to 5.3-5.5 per cent as the projected revenue increases and subsidy cuts fail to materialise.

Given this scenario, economists have their doubts about the finance ministry’s optimism to cut the deficit by 0.8 percentage points to 5.1 per cent of GDP in 2012-13. Much of the criticism relies on subsidies. For example, the government had provided for just Rs 23,640 crore for oil subsidies in Budget estimates for this financial year, but revised estimates were almost three times at Rs 68,481 crore. For 2012-13, the government has provided Rs 43,580 crore towards subsidy.

Realising, albeit a little late in the day, that even this amount may not be sufficient if global crude prices continue to hover over $120 barrel, the finance minister said the government would call the meeting of Opposition parties and state government to take corrective steps. The government had assumed global crude prices to be $90 a barrel at the time of making the Budget for 2011-12. That was revised to $115 a barrel in the Budget, presented two days ago. For the next financial year, the Budget had assumed global crude prices to be $120 a barrel. But of late, the Indian basket price has been $122-125.

Soon after the budget blues hit the oil and gas market, the buzz was out that fuel prices may go up by big margins end March when parliament goes into recess. "We don't need permission for increasing petrol prices and the same will be done shortly," said a senior oil official, who didn't wish to be identified, said. "But for diesel and cooking gas, we'll have to wait for instructions from the government." State-owned oil firms are looking at an increase of between Rs 4-5 a litre on petrol, Rs 3-4 a litre on diesel and Rs 50-75 on a cylinder of cooking gas (LPG).

The Prime Minister's Office (PMO) has stepped in and set up a high-powered Committee of Secretaries (CoS) to examine all issues of the petroleum sector and to give its recommendations for grant of smooth clearances in future, including working conditions for foreign nationals of Pakistan, Sri Lanka and Bangladesh. It has always been a challenge to remove the unreasonable roadblocks and to win the confidence of international investors in the oil and gas exploration operations in India. The rollout of NELP IX, which has been delayed for months now, has been stuck due to non-cooperation from the Defence Ministry and Department of Space in clearing the blocks.

The CoS will comprise Secretary, Petroleum and Natural Gas; Secretary, Coal; Secretary, Ministry of Environment and Forests; Secretary, Law and Justice and a representative from the Planning Commission. This decision was taken after a meeting convened by the Principal Secretary to the Prime Minister, Pulok Chatterjee, on March 3.

The CoS would specifically look into setting clear guidelines for deployment of manpower from countries such as Pakistan, Sri Lanka and Bangladesh. The CoS would also look into the issue of grant of work permits for foreign nationals and suggest their terms and conditions to avoid delays. MHA clearances for foreign nationals deployed are now issued block-specific. Clearance is required be issued as per the number of days of deployment of individual for a particular operation like drilling, survey in multiple blocks. The CoS would also look into the issues with State governments like urban, SEZ and agricultural land, the issue of tribal land free from all encumbrances and law and order.

The realization that it had become necessary to set up such a committee kicked in after the “bad experience” of the Petroleum Ministry, which is faced with non-cooperation from various departments and Ministries in the grant of clearance for exploration operations in various parts of the country. Nearly two dozen oil and gas blocks offered under various new exploration licensing policies (NELPs) are stuck at various stages due to “dragging of feet” by the Defence Ministry, Department of Space and various other agencies, putting question mark over the credibility of the Indian policies in the eyes of the international investors.

The CoS would examine all the issues and give its recommendations as soon as possible so that no objection certificate (NOC) obtained before allocation / bidding of the blocks, for petroleum, gas or coal, is comprehensive and meaningful so that after the blocks are awarded there are no delays on account of clearances.

Under the law, one-time all inclusive clearance is required from ministries of Home Affairs, External Affairs, Environment and Forests, Defence (DRDO, Army, Navy, Air Force), Coal, Mines and other agencies such as Department of Space, DGCA and Research and Analysis Wing (RAW) prior to the offer of blocks pertaining to `Petroleum Operations' related to oil, natural gas, CBM, shale gas/oil, oil shale and gas hydrate on onshore and offshore area up to EEZ.

Railway Minister Dinesh Trivedi  has pledged to set up renewable energy generation capacities—such as wind power, solar energy and bio-diesel plants—for use in the railways. Rail corrosion due to human waste costs the railways more than Rs350 crore every year, the railway minister said. The renewable energy plans of the railways include setting up 72 megawatts (MW) wind power plants in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and West Bengal. This will also help the carrier avail fiscal incentives, including tax breaks for 10 years and depreciation benefits, besides a chance to earn carbon credits. 

In addition, the railways will also install biotoilets developed by state-run Defence Research and Development Organisation (DRDO) in 2,500 coaches in the next fiscal to stem environmental degradation and corrosion of tracks due to human waste. “The rail corrosion costs railways more than Rs350 crore every year. As also pointed out by both Kakodkar and Pitroda committees, there is an urgent need to replace the conventional open-discharge toilets,” Trivedi said in his speech. The railways also plans to use solar energy to run 200 stations and provide lighting systems at 1,000 manned, level-crossing gates.