As usual the Union Budget for 2008-09 has been discussed and dissected at different fora by different stakeholders from their individual vantage points. What is most shocking is the deafening silence on the impact of high inter- national petroleum prices on the budget.
Even the US economy which is already suffering on account of sub prime housing loans is deeply concerned with the inevitable impact of high oil prices. How can India which is more than 70 per cent dependent on imported oil be indifferent to the high oil prices? Why has Chidambaram ignored the all important issue of the increasing burden of oil subsidies on the budget while including a food subsidy of Rs. 32,667 crore? It is equally surprising that other significant stakeholders in oil sector like the navaratna oil companies, oil dealers, political parties, energy economists and consumer NGOs have also failed to comment on this issue.
Between April 2004 and December 2007 average basket of price of Indian crude oil has gone up from $32.36 per barrel to $87.92, an increase of 172 per cent. During this period, price of petrol in Delhi has gone up from Rs. 39 to Rs. 43.52 per litre. It was only in February of this year, the government finally decided to increase the price of petrol by Rs. 2/litre and that of diesel by Rs. 1/ litre to compensate partly the oil marketing companies. At the end of February crude prices have finally crossed the psychological magic level of $100 per barrel. It is competitive politics which has forced the government led by an economist not to pass on the huge crude oil price increase.
During the preparation of the recent Union budget, one would have hoped that finance minister will attempt to solve the grave problem of the oil companies by reducing taxes. Surprisingly he did not discuss this topic at all. To his credit, he has finally gotten rid of the ad valorem tax on petrol and diesel. But he kept the total tax amount more or less at the same level by increasing the fixed portion.
Navratna oil companies losing justice
Government should not allow navratna oil companies to go bankrupt. They are some of the very few shining stars in India's public sector. However, if the current situation continues, the inevitable will happen. Why has FM failed to discuss the crisis in the important oil sector affecting the economy when he proudly announced the funds for power, coal, renewable energy sources, etc? This cannot be an oversight. Perhaps he did not want to rake up the subject to avoid any backlash from his allies, mostly the Communists.
 At crude oil price of $90 per barrel, I estimate the subsidy cost to the government of Rs. 16,411 crore and Rs.19,005 crore on account of LPG and PDS kerosene respectively. I have constructed a simple computer model to simulate the impact of crude oil price changes on subsidies and resultant revenue losses to the government. A significant part of kerosene subsidy does not reach the poor. Even worse, PDS kerosene is diverted to blend with petrol and diesel which results in revenue losses of Rs. 14,000 crore to the government. Residential LPG is diverted to commercial and auto sector resulting in black money of Rs.11,317 crore. Since government is forcing oil marketing companies to lose money by holding down petrol and diesel prices below cost, unintended subsidies given by the government, mostly to the middle class on account of these two products, is about Rs. 51,000 crore per year.
Oil subsidy of over Rs.86,000 crore
 In short the total oil sector subsidy is more than Rs. 86,000 crore. This is more than Rs. 60,000 crore farmer loans write off and does not get even a footnote to the budget. It is true that some of this subsidy mostly for PDS kerosene to the poor is justifiable. But when we know from various studies that more than 40 per cent of it is diverted, why has no state government come forward to introduce a smart card system to prevent the leakage as recommended by the Planning Commission?
When we compare the total impact of LPG and kerosene subsidies, diversion of PDS kerosene to petrol and diesel, diversion of residential LPG to commercial and auto sectors, inability to pass on the increasing cost of higher oil prices to petrol and diesel consumers against the total fiscal deficit of Rs. 133,287 (see Chart-2), it becomes obvious, that there is a need to take some difficult decisions. The government cannot just ignore these problems. Chart-2 shows the com- parison of total impact of wrong pricing policies in petroleum sector which amounts to Rs. 110,000 crore (subsidy cost of Rs. 86,000 crore and revenue losses of Rs 14,000 crore through diversion of subsidised products) against farmers' loan waivers of Rs. 60,000 crore and also against the total fiscal deficit. Newspapers have given correctly the head lines to loan waivers. But one hardly hears about the subsidies given to the middle and rich classes in the petroleum sector.
Why not smart card for PDS kerosene?
Finance minister has rightly praised Haryana and Chandigarh for their pioneering efforts to introduce smart card system on an experimental basis in the case of foodgrain under PDS. He could have at least asked them and others to introduce smart card system to distribute PDS kerosene and offered some incentives. Since lot more black money is earned by diverting PDS kerosene, there might have been less interest to introduce smart card system on the part of the states. It is also well known that kerosene, petrol and LPG dealers are politically well-connected and in many cases are politicians themselves.
Let us hope that when the budget discussion takes place in the parlia- ment, at least a few MPs will raise this issue of oil sector subsidy to get answers on the quantum of subsidy, the real beneficiaries of these subsidies, impact of these subsidies o n economy and the quantum of black money generated by diverting PDS kerosene and residential LPG. Responses will be simply shocking and may lead to much needed reform.
FM should have included the funds required in the budget to meet all the subsidies in the oil sector correctly and also for loan waivers to the farmers as expenditures. This would have given a true picture of budget deficit. High level of deficit financing of this kind will only result in higher inflation which in turn will affect poor more than the rich. Thus the government in the name of helping the poor through subsidies will end up harming them even more.
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