Oil ministry wants govt to shoulder 66% of subsidy

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jul 30 2010, 06:34am hrs
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After deregulating petrol price, the government is now rejigging the formula for apportioning subsidy burden. As per a petroleum ministry proposal under North Blocks consideration, the government would bear two-thirds of the estimated subsidy requirement in a financial year, while upstream crude oil producers and downstream fuel retailers between them would bear the rest.

We want the government to compensate for two-thirds of the under-recovery (losses of retailers due to selling fuel below cost), petroleum secretary S Sundareshan told FE. The remaining would be borne by upstream firms ONGC, Gail India and Oil India along with downstream firms HPCL, IOC and BPCL.

If the finance ministry agrees to this, governments proportionate share in the under-recovery this yearestimated at Rs 53,000 crore at a crude price of $75 a barrel would rise to 66% from last years 56%. In absolute terms, that would be a rise from last fiscals Rs 26,000 crore to Rs 35,333 crore this year. The finance ministry, however, has allocated only a small petroleum subsidy component in its budgetRs 3,108 crore for this fiscal for kerosene and LPG. The original subsidy allocation in the Budget is almost invariably raised upwards. Its decision last year to stop the practice of issuing oil bonds to fuel retailers and give cash subsidy instead, is an act of tying its own hands when it comes to approving subsidy because cash subsidy would require making a saving somewhere else.

The remaining Rs 17,667 crore will have to be met by both upstream firms and retailers. That would bring some relief to upstream firms ONGC, GAIL India and Oil India, which shouldered 31.3% of last fiscals under-recoveries at Rs 14,430 crore. For fuel retailers IOC, HPCL and BPCL, an equal sharing of burden with upstream firms would mean absorbing more of their under-recoveries. Last fiscal, the retailers absorbed only 12.2% at Rs 5,621 crore.

In 2009-10, the government had followed a different formula under which upstream companies financed the losses due to selling petrol and diesel below cost, while the government took care of most of the losses from kerosene and LPG. A small portion was borne by retailers too. That made the government the biggest contributor of subsidy at slightly more than 56% of the total under-recovery of Rs 46,051 crore, followed by 31.3% by upstream companies and 12.2% by retailers.

In the first quarter of this fiscal, Rs 6,600 crore has already been given by upstream companies by way of discounts out of a total under-recovery of Rs 20,072 crore. Often, the government announces its decision to give subsidy in the same fiscal, but the actual funds come to retailers much later. Although free pricing is applicable to petrol from June 25, other fuels like diesel, kerosene and LPG are still subsidised.