The Centre will provide an additional Rs 22,000 crore to the state-run oil marketing companies (OMCs) to compensate them for the under-recoveries on cooking gas between June 2020 and June 2022.
The Union Cabinet approved this ‘one-time grant’ for Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). Share prices of all three companies rose on Wednesday with IOC closing 1.89% higher while BPCL and HPCL ended with gains of 0.85% & 0.05% respectively on the BSE.
“During the period from June 2020 to June 2022, the international prices of LPG increased by around 300%. However, to insulate consumers from fluctuations in international LPG prices, the cost increase was not fully passed on to consumers of domestic LPG. Accordingly, domestic LPG prices have raised by only 72% during this period. This has led to significant losses for these OMCs,” the government said in a statement.
This means that subsidy expenditure on fuels, which was brought down to just Rs 241 crore in FY22, will rise significantly in the current financial year. In the FY23 Budget, the Centre made a provision of Rs 5,800 crore for LPG subsidies, including a direct benefit transfer of Rs 4,000 crore for domestic use and another Rs 800 crore for the poor under the Ujjwala scheme.
The three state-run retailers – IOC, BPCL and HPCL – which account for over 90% of domestic fuel supplies have suffered a combined loss of Rs 18,480 crore due to erosion in the marketing margin on petrol, diesel and domestic LPG in Q1FY23. ICICI Securities has estimated that these three companies will see operating losses at about Rs 23,000 crore in Q2FY23 due to weak refining margins, marketing margins and inventory losses.
“Average cracks for gas oil declined $8.7/bbl q-o-q to $35.1/bbl and after adjustment for excise duty, net gas oil cracks were $15.4/bbl. Average gasoline product cracks saw a decline of $26.6/bbl q-o-q to $9.02/bbl while net gasoline crack was $7.02/bbl,” ICICI Securities said in a note on October 9.
Even though no LPG subsidy has been transferred to the bank accounts of households since June 2020, an incomplete pass-through of costs to consumers has inflated the state-run OMCs under-recoveries on this front. Also, the re-introduction of LPG subsidy under the Ujjwala Yojana –under which up to 12 LPG cylinders a year are given to 90 million people at the rate of Rs 200/cylinder — in May 2022 is seen to cost Rs 6,100 crore in FY23.
Budgetary LPG subsidy came down from Rs 24,172 crore in FY20 to Rs 11,896 crore in FY21. The subsidy was just Rs 241 crore in FY22. Given that other fuels, including petrol and diesel, are decontrolled, the Centre’s Budget was almost completely freed from the burden of fuel subsidy in FY22, marking an end to a sticky and politically-sensitive item of revenue expenditure it struggled long to get rid of.
Since June 2020, the subsidies on domestic LPG have been limited to small amounts of freight subsidies for far-flung regions. The higher fuel subsidies may put further stress on the government finances, already under pressure due to about Rs 2.4 trillion in additional subsidies announced for FY23, mainly for food and fertiliser. It had also cut excise duty on petrol and diesel which will likely result in about Rs 85,000 crore revenue loss.