The Centre will likely provide an additional amount of around Rs 20,000 crore – over Rs 5,800 crore budgeted – to the state-run fuel retailers to compensate them for the under-recoveries on cooking gas in the current financial year, according to a senior finance ministry official. This means that subsidy on fuels, which was brought down to just Rs 241 crore in FY22, will rise significantly in the current year.
“The government recognises the fact that oil companies need some compensation. A final decision on the precise amount of compensation will be taken on how prices of Indian crude oil basket move,” the official told FE.
The petroleum ministry had sought even a higher amount to cover OMCs’ losses in the current financial year from sale of LPG, as well as some past arrears, sources said.
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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 oil marketing companies’ under-recoveries on this front. Also, the re-introduction of LPG subsidy under the Ujjwala Yojana –under which upto 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.
The three state-run retailers – IOC, BPCL and HPCL – which supply over 90% of domestic fuel supplies have suffered the worst quarterly under-recoveries in retail fuel sales in years in Q1FY23 by absorbing record international crude prices.
Nomura had estimated OMCs’ under-recoveries on LPG in Q1FY23 alone at Rs 9,000 crore. According to it, in H2 last year, the under-recoveries were to the tune of Rs 6,500-7,500 crore.
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“Despite posting record gross refining margins ($17-32/bbl), in line with record Singapore benchmarks in Q1, overall earnings for the three OMCs have declined sharply in Q1, thanks to record high fuel retail losses of Rs 10-12/litre for petrol and diesel in the quarter,” according to ICICI Securities.
“OMCs not passing on the increase in crude oil costs to customers resulted in weak marketing margins. Crude oil prices were trading at elevated levels but prices of petrol and diesel at retail outlets were steady. Correction in crude oil prices may improve marketing profitability of these companies,” ICICI Direct in a report on September 10.
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.
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 trillion additional subsidies announced for FY23, mainly for food and fertiliser. It had also cut excise duty cut on petrol and diesel which will likely result in about Rs 85,000 crore revenue loss.