The finance ministry, struggling to meet its difficult fiscal deficit target of 4.8% of the GDP for the current fiscal, has been slapped with a hefty bill it wasn’t accounting for. In a joint letter shot off to the ministry, the finance heads of the three public sector oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — have asked for an additional R20,000 crore compensation this fiscal for certain costs they accumulated over the last seven years, consequent to the policy of subsidised sale of petroleum products.
This bill includes the interest costs on borrowings that resulted from delayed release of subsidy amounts, the losses on the now-discontinued oil bonds for which there’s only limited appetite in the market and the extra costs for transportation of LPG to far-flung areas which the current under-recovery estimates don’t factor in.
OMCs sell their products below cost and the under-recoveries are compensated through cash payment by the government (budgeted subsidy) and discounts offered by upstream oil companies ONGC, OIL and GAIL India in a 1:2 ratio. The under-recoveries estimated for first half of this fiscal is R60,907 crore, while it was R1.61 lakh crore in FY13.
In fact, immediately after the Budget for FY14 was presented by the finance minister with an oil subsidy estimate of R65,000 crore, petroleum minister Veerappa Moily had talked about a pending bill of R32,000 crore to OMCs.
It is unlikely that the finance ministry would provide for the entire R20,000 crore arrears in compensation this fiscal.
In any case, the additional burden is not only for the government but also for the upstream companies that have of late been vocal against the increasing share of the subsidy burden on them. ONGC chairman Sudhir Vasudeva recently said that the company could be constrained to dip into its cash reserves to meet even operational expenses in a couple of years if the subsidy yoke on it isn’t removed.
In their eight-page letter, the OMCs’ finance heads pointed out eight areas of operations that are draining the companies of valuable cash due to selling