India faces oil crisis triggered by the new war in Iraq

The perfect storm for the Indian economy is brewing in West Asia. 

The surge in international crude oil prices triggered by the new war in Iraq is set to blow a hole in the Narendra Modi-led NDA Govt's Budget Plans, and slow down any attempt to revive the economy

On Wednesday June 18,2014, the news filtering out from Iraq put the dreaded scenario firmly on the horizon of the Narendra Modi-led NDA Govt, which is preparing to present its first Budget in July 2014

India is the world's 4th largest consumer of oil, importing as much as 80 % of its crude requirements

Indian oil companies import 190 million tonnes of crude every year, of which 25 million tonnes are sourced from Iraq. Indian Oil Corporation leads the list with 12.7 million tonnes.

The price of the Indian basket of crude oil imports jumped by close to $4 a barrel to touch $ 110.42 per barrel over the last week.

The rupee has also weakened vis-à-vis the dollar. This will add to the cost of imports, and every dollar increase in crude oil prices means India has to shell out an extra $1 billion to subsidise the losses of public sector oil marketing companies.

The under-recoveries of the public sector oil companies for the financial year 2014-15 are projected at Rs 91,665 crore, but if the crude prices continue at current levels the figure is bound to shoot up and increase the subsidy burden on the government.

"The under-recoveries had touched Rs 1, 39,869 crore in 2013-14 and the situation appears to be headed that way again,'' a senior official said.

The Finance Minister of the last UPA Govt, P. Chidambaram, provided a mere Rs 63,427 crore as the subsidy for petroleum products in his interim Budget for the financial year 2014-15.

That this was way too optimistic can be gauged by the fact that total subsidy the government provided in 2012-13 on kerosene, diesel and LPG was Rs 96,880 crore

Similarly, Chidambaram provided only Rs 67,970 crore in the interim budget for meeting the fertilizer subsidy bill of the government, which is also likely to go up.

Rising crude prices also push up the cost of naphtha, which is used as an input for urea. 

Chidambaram's move to drastically prune the fiscal deficit in the interim budget for 2014-15 to 4.1 per cent of GDP was based on window-dressing the subsidy numbers, and the crude oil shock appears set to blow the lid off the exercise.

The total projected subsidy bill - largely food, fertilizer and fuel - of  Rs 2,40,000 crore could well bloat to over Rs 3,00,000 crore. 

That's not a huge burden considering the size of the Indian economy is well over Rs 100 lakh crore, and works out to just 3%