India’s kerosene subsidy bill in March was zero because of low oil prices, compared to about Rs 100 crore in the previous month and Rs 339 crore in the same month a year ago, two officials familiar with the matter said on condition of anonymity.
Oil prices continue to remain weak in the face of falling demand as the Covid-19 pandemic takes its toll on economies. The International Monetary Fund (IMF) has projected a 3% contraction in the global economy this year and estimated a muted, but positive growth for the Indian economy at 1.9%.
States purchase kerosene for public distribution at market prices from refiners in line with their allocated quota; a part of that price is subsidised by the Centre from the Union budget. Because of low international oil prices, the cost price for states fell considerably, eliminating the requirement for the Centre to pay any subsidy. In February, the Centre paid a subsidy of Rs 4.39 per litre for kerosene.
The fall in international oil prices has helped India, which imports about 80% of its oil requirements, save about 21% on liquefied petroleum gas (LPG) subsidy. Its expenditure on subsidised LPG or cooking gas in March came down to Rs 2,482 crore compared to Rs 3,169 crore in February 2020, the two officials said.
“The subsidy amount, thus saved, will be used to fund the government’s commitment to give three LPG cylinders for free to over 80 million poor households under the Pradhan Mantri Garib Kalyan Yojana,” one of the officials said.
The three cylinders scheme is expected to cost around Rs 12,000, he said. “We hope to bear the cost of additional LPG refills within the approved budget for 2020-21, if international oil prices do not spike.”
Budget 2020-21, announced on February 1, estimated the country’s total petroleum subsidy at Rs 40,915 crore in the current financial year.
The government on March 26 launched a Rs 1.7 lakh crore relief package for the poor that included free supply of three 14.2 kg cooking gas cylinders to existing beneficiaries between April and June. So far, state-run oil marketing companies have distributed 15.1 million free cooking gas refills, the first official said.
It is too early to quantify total savings on petroleum subsidy because global oil prices are extremely volatile and huge price fluctuations were witnessed in 2008-09, the second official said. International crude oil prices crashed to $40 in December 2008 only to surge to all-time high at $147 per barrel in July 2008.
According to the International Monetary Fund’s (IMF) World Economic Outlook, released on April 14, the average petroleum spot price per barrel is expected to be $35.60 in 2020 and $37.90 in 2021.
The second official said oil prices are expected to remain low at least this year because of low demand due to the global economic downturn, which will be in favour of India.
“The free fall of global oil prices has continued despite major crude producers deciding to cut output earlier this month,” he said.
The oil producers’ cartel, the Organisation of the Petroleum Exporting Countries-plus (OPEC+), which also includes Russia, on April 12 announced a 9.7 million barrel per day cut in oil output from 1 May. Despite the announcement, global oil prices have remained subdued. Benchmark Brent crude, which was around $32 per barrel on April 12, plunged to $28.08 on Friday. On Monday, it was hovering around $27 a barrel, about 3.77% down from the previous close.
“GoI [Government of India] has announced free LPG for 3 months to the poor, and allocations around this announcement will add to the subsidy BE. Therefore, [overall] fuel subsidy is not likely to reduce.”