Posts tagged ‘Under recovery vs. loss’

Petroleum Subsidy Calculation

We all know Indian government is spending in billions on subsidies. You can refer previous post on government expenditure and Income for better understanding. Let’s see how much we spend on our subsidies. In budget 2012-2013 government kept aside ~190000crs for subsidies. Major subsidies are Food (39% of total subsidies as per budget estimate), Fertilizers (32%) and Petroleum (22%). Though it is always known that petroleum subsidy breaches the target by huge margin. Food and Fertilizer subsidy on a priority wise are more important than that on petroleum products. Hence Corporate India and Economist always pressurize the government to reduce petroleum subsidy by increasing prices of diesel. We will discuss components of petroleum subsidy and few other parameters related to it. India is net commodity importer hence any turmoil in the global economy which spikes commodity prices have cascading effect on India.

Petroleum subsidy is majorly classified into three categories:

  • LPG
  • Diesel
  • Food

Note that petrol pricing is deregulated.

Any price increase in LPG, Diesel and kerosene affects the subsidy bill. I am attaching an excel sheet below. Subsidy Calculation

I have added daily consumption of LPG, Diesel and Kerosene (data which I gathered from different news report, if you have any pother accurate source then please let me know).  Note that total LPG cylinders subject to subsidy are limited hence there may be some room of adjustment. Diesel consumption is growing very fast considering the fact that petrol-diesel price parity has increased substantially in the last few years. People are interested buying diesel cars thereby increasing Diesel demand which puts pressure on government for every litre of consumption. So as the parity between Petrol and Diesel increases Diesel consumption will increase that will result in higher subsidy bill of government.  Once you download the sheet you can update the consumption figure as when they are revised. You can get the under recovery price per unit on a daily basis here.

Do not interpret Under-Recovery and Loss as one and the same.

The amount you see as under recovery is not the actual loss. It is a notional loss. Let’s understand.  India import ~75-80% of its oil needs. Let’s say India consumes 100litres of oil a day. So ~75-80litres will be imported whereas rest in produces in the Indian Territory itself. If local price of local oil is 10rs/litre and cost of imported oil is ~14rs/litre the 4rs is the under recovery.  Now the reason I say Under recovery is not loss because local price of 10rs is not the cost but selling price.

So how is this under recovery settled?

Government obviously does not pay off full amount of under recovery. They negotiate and approximately compensate 55-60% of under recovery rest is to be beard by the OMCs.

Appreciate your Inputs…

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