Oil fiasco in the Budget

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FM is only cheating himself with faulty budget accounting

In this year's Union budget, Pranab Mukherjee earmarked all of Rs 20,000 crore for oil marketing companies as compensation for selling diesel, kerosene and cooking gas below cost to consumers.

The money's already over. All of it went towards paying last year's subsidy bills sent in by Indian Oil, Bharat Petroleum and Hindustan Petroleum – the three big oil marketing companies. For this year (2011-12), Mukherjee has an empty kitty. He is left with one of two options: raise diesel, cooking gas and kerosene prices, or borrow more to pay out subsidies.

In the year before, Mukherjee had again under-budgeted for oil subsidies and ended up paying out Rs 35,000 crore (he had provided zero subsidy in his 2010-11 budget). Add the Rs 20,000 crore paid out from this year's budget, and we have a neat Rs 55,000 crore of under-budgeting. Either Pranab-da's math skills are very poor or his accounts are a piece of fiction.

Why does the Finance Minister set great store by unrealistic accounting practices which are proven wrong barely a few weeks after the budget is presented?
The truth is, Mukherjee is cheating no one but himself when he does not budget adequately for oil subsidies. The economists who watch the budget numbers closely know the numbers are false. The markets know he's fibbing, and duly discount the prices of oil companies. The oil companies know they are being screwed, but they can't protest since they are owned by the government.

Dear Mr Mukherjee, when you lose tax revenues, when the share values of your assets are falling, when your banks are making money at the cost of the exchequer, when inflation is raging due to excessive deficit financing, what can you lose with some honest accounting for oil subsidies?

The article in full can be read here: FM is only cheating himself with faulty budget accounting | Firstpost

 

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As it is economists are predicting a double digit inflation growth due to the oil price hike announced 2 days back. To contain this the Central Bank will go in for another hike in rates, leading to a further slowdown in the economy. Clearly this is a dangerous spiral we are getting into.

 

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Meanwhile it looks like there are more Oil price hikes in the near future from the Govt.

Oil price hike was done with mirrors, so expect more

On the face of it, it seems like the UPA government took courage in both hands and raised the prices of diesel, kerosene and cooking gas in one fell swoop on Friday.

But did it, really?

The price hike of Rs 3 a litre in diesel is a mere token of acknowledgement that something needed to be done. The rise in kerosene by Rs 2 a litre and cooking gas by Rs 50 a cylinder are bolder moves, but insignificant compared to the scale of the problem.
In fact, what the government really did was take one tentative step forward and three-quarters of a step backwards. It chickened out of a real increase in petro-goods prices for fear of political criticism and popular backlash – of which there is no shortage.

There could, however, be another explanation for the low level of hikes: more coming later this year. This may just have been a trial balloon to gauge public anger.

Full article is here : http://www.firstpost.com/business/oil-price-hike-was-done-with-mirrors-so-expect-more-31375.html

 

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The timing from the Govt. couldn't have been worse. Against a backdrop of Global Crude oil prices plunging, GOI goes in for Oil price hike.

Crude oil prices plunge in hectic week

Oil tumbled this week after the International Energy Agency (IEA) agreed to draw on emergency reserves to make up for lost Libyan supplies and as global economic recovery fears prompted demand concerns.
Brent North Sea crude for delivery in August nosedived by a hefty US$6.95, or 6.0 percent, in value on Thursday.

The Article : Crude oil prices plunge in hectic week - Taipei Times