* Oil at $120 for 3-4 months to cost an extra $3.3 billion -
* Annual oil import bill $165 billion
* Government liabilities to lossmaking state refiners pile
* Experts urge faster hikes in diesel prices
(Writes through with source quotes, background)
By Manoj Kumar and Nidhi Verma
NEW DELHI, June 18 India's government expects
oil prices to rise as high as $120 per barrel for several months
because of fighting in Iraq, potentially driving a hole of at
least 200 billion rupees ($3.3 billion) in the budget, two
government sources told Reuters.
Prime Minister Narendra Modi won last month's general
election by a landslide with promises of faster economic growth
and new jobs, tapping into voter anger over India's longest
slowdown in a quarter of a century.
Ahead of his maiden budget next month, Finance Minister Arun
Jaitley is grappling with a food inflation scare, and now faces
the risk that higher oil prices could swell the government's
"If oil prices remain high even for three to four months
around $120 a barrel, it could have a significant impact on the
fiscal deficit and economic growth," a senior Finance Ministry
official told Reuters on condition of anonymity.
The official added that this could increase subsidy costs by
200-225 billion rupees in the fiscal year to March 31, 2015.
That would threaten the deficit target of 4.1 percent of
gross domestic product inherited from the last government.
"If oil prices remain high, it would not be easy to meet the
fiscal deficit target," the source added.
India, the world's fourth-largest oil consumer, imports
around 4 million barrels a day of crude oil - costing $165
billion a year at current prices, or more than a third of its
total import bill.
The last government based its interim budget in February on
an assumption that India's basket of oil imports would cost
around $105 per barrel on average in the current fiscal year.
Prices for Brent crude, an international oil benchmark, have
risen by $3 to $113 over the past week, during which Islamic
militants have taken control over tracts of northern Iraq and
threatened the authority of the Baghdad government.
For every dollar that oil prices rise, the government incurs
annual costs of 70-75 billion rupees (around $1.2 billion) to
compensate state oil firms for selling diesel, kerosene and
other fuels at below cost.
Subsidies are assessed quarterly, based on the average oil
price in the preceding quarter. That means that the higher
expected oil price would feed through into subsidy costs in the
second half of the fiscal year.
As well as paying out cash subsidies, previous Finance
Minister P. Chidambaram allowed liabilities to pile up towards
lossmaking state oil refiners, leading to accusations that he
was shifting debts off the government's balance sheet.
An official at the Oil Ministry said that these revenue
losses at state fuel retailers, or "under-recoveries", could
again touch last year's level of nearly 1.4 trillion rupees, up
from an earlier estimate of nearly 1 trillion rupees.
ICRA, the Indian arm of ratings agency Moody's, estimates
that the losses could rise further to 1.5 trillion rupees if the
rupee falls further to 62 to the U.S. dollar.
The rupee sank on Tuesday to its lowest level since
late April, before recovering slightly to 60.12 on Wednesday
after senior officials played down the economic threat posed by
the Iraq crisis.
Fuel subsidies have been widely criticised as a regressive
tax on the poor that rewards relatively affluent Indian drivers,
and retail prices for diesel are being gradually raised to bring
them into line with market prices over time.
Finance Ministry officials and private economists favour a
one-time hike in diesel prices of about one rupee a litre and a
marginal increase in kerosene and liquefied petroleum gas prices
to offset the fiscal impact of elevated oil prices.
But the government is unlikely to hike fuel prices beyond
monthly increases of 50 paise per litre in diesel prices already
being made, amid growing fears of a drought and its impact on
India's consumer price inflation eased to 8.28
percent in May, but remains a concern. Wholesale price inflation
was stronger than expected at 6.01 percent, a
"An increase in diesel prices by one rupee a litre could
lead to a rise in retail inflation by 0.8 to 1 percentage
point," said N.R. Bhanumurthy, an economist at the National
Institute of Public Finance and Policy, a Delhi think-tank.
"It may be politically acceptable at this stage," he said.
(Editing by Douglas Busvine & Kim Coghill)