Budget 2013: Will diesel decontrol help oil subsidy projections?

Click here to read Indian Oil's press release on MS, HSD AND LPG

Chidambaram is right, as oil subsidies are calculated by calendar year, whereas the rest of the expenses are accounted on the basis of the financial year (April to March). The anomaly is on account of the opaque and complex manner in which oil subsidies are calculated in India, something that is bound to influence the budget math for 2013/14 too.

For a start, there is no defined formula to calculate oil subsidies, of which diesel is the largest. Typically, the finance ministry picks up half the tab, oil producer ONGC is asked to contribute about a third, and the rest is forced onto the books of the public sector oil marketing companies.

Inevitably, there are disputes between the finance ministry and oil companies on the extent of subsidies. Therefore, the finance ministry uses December 31 as the cut-off date to provide subsidies and prefers to wait for the oil companies' audited results.

Despite the cabinet's decision to allow these companies partial freedom in pricing products, the oil subsidy projection in budget 2013/14 is going to be a nightmarish exercise. And, finance ministry officials will face two more challenges while doing their math. They have to take a call on the international pricing trend of crude oil and also second guess the extent to which politicians will allow oil companies the freedom to set prices.

The number of unknowns in the equation make oil subsidy projections in the budget among the most contentious. In 2012/13, the budget initially projected that the oil subsidy would be capped at Rs 43,580 crore, while the final bill would be around Rs 72,000 crore.

Expect Chidambaram to be forced to defend his math after the budget is presented.