78 days of the Iran war cost the Indian government USD 13 bn to control fuel prices

India’s state-run oil marketing companies (OMCs) received nearly INR 1.23 tn (USD 12.9 bn) in government support to hold fuel prices for 78 days following the Iran war, Hindu Businessline reports, citing officials. The support now sits alongside the government’s aviation turbine fuel (ATF) price-stabilization scheme for domestic airlines as the government tries to contain the fuel shock without fully absorbing it on public balance sheets.

The fuel cushion is still under strain. OMCs are losing around INR 6.5 bn (USD 68 mn) a day by selling fuel below global crude-linked prices. This comes despite four gasoline and diesel price hikes since 15 May.

The government is taking a hit of INR 10 per liter on fuel after slashing the excise duties on 27 March. The government also launched an INR 100 bn (USD 1.05 bn) fund earlier this month to subsidize jet fuel for domestic airlines.

Added to this, the fertilizer ministry has raised a demand of INR 3.4 tn (USD 35.7 bn) to cover subsidies to farmers. This accounts for a 100% surge in the fertilizer subsidy check which was budgeted at INR 1.7 tn in the country’s national budget announced in February. The government subsidy on each bag of urea has increased by 55% to INR 4.5k from 2.9k before the war.

How will the government fund the bill? The finance ministry is likely to double down on the divestments and asset sales in the current fiscal year to offset unplanned expenditure. This will include a USD 1 bn secondary share sale in Life Ins. Corporation and expedited timelines on the IDBI spin-off which had generated interest from the Dubai-based Emirates NBD. For now, the government is inclined toward measures to boost capital inflows rather than curbing the outflows, the news outlet notes.

Controlling ATF prices

Meanwhile, the USD 1 bn ATF subsidy scheme became operational today, offering jet fuel at INR 115 per liter (USD 1.21 per liter) to domestic airlines for three years, Reuters reports. The fixed rate is 10% higher than the previous price, but it gives airlines a ceiling against further spikes if they opt in.

The catch: The scheme gives airlines price certainty, not cheaper fuel. Carriers that opt in will pay the fixed rate for up to three years, even if global prices fall, while those that stay out will remain on market-linked rates. The money will go to OMCs as no-interest advances to cover under-recoveries — the gap between market-linked ATF prices and the rates charged to airlines.