The finance ministry is likely to finalise a compensation fund of Rs 32,000-35,000 crore for state-owned oil marketing companies to cover the under-recoveries they have made on the sale of liquified petroleum gas (LPG) cylinders, government sources said.
The funds will be raised from the excise duty hike on petrol and diesel of Rs 2 each effected in April. The Cabinet is likely to approve the proposal to compensate OMCs soon, according to the sources.
The OMCs has not increased retail prices of petrol and diesel after the April excise hike.
In addition to the hike in excise duties, the government had also increased the price of LPG cylinder by Rs 50 in April, applicable to both Ujjwala beneficiaries and the non-Ujjwala consumers.
Prices of LPG in the country are linked to its price in the international market. The government continues to modulate the effective price to consumers for domestic LPG.
The government estimates that the three OMCs to have incurred losses over around Rs 41,338 crore in FY25 on the back of rising international benchmark prices.
India imports about 60% of the domestic LPG consumed. As per the oil ministry estimates, average Saudi CP (international benchmark for LPG pricing) rose by 63% from $ 385/MT in July 2023 to $ 629/MT in February 2025.
Considering this, the retail selling price of a LPG cylinder in Delhi should have been translated to Rs 1028.50 for a 14.2 kg cylinder in April but was being sold at Rs 803.
The Rs 50 per cylinder hike was expected to provide support to the profitability of the three OMCs — Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd (BPCL), and Indian Oil Corporation Ltd (IOC) — which were suffering massive under-recoveries on the sale of domestic LPG.
The fund support to the three OMCs will likely boost their capex plans, the source said.
Assuming volume growth of 2% for diesel, and 6% for petrol, the annual revenue mop-up from the excise hike would be about Rs 35,000 crore, Prashant Vashisht, Senior Vice President & Co-Group Head, ICRA, had said.
During the period 2020-21 to 2022-23, the average Saudi CP (international benchmark for LPG pricing) went up from $415 per million tonnes to $712 per MT. However, the increase in the international prices was not fully passed on to the customers. This resulted in public sector OMCs incurring Rs 28,000 crores loss due to under-recoveries. However, the government approved a one-time compensation of Rs 22,000 crore for oil marketing companies in October 2022 to enable them to operate freely.
In the Union Budget for 2025-26, the government has made no provision to compensate OMCs for the under-recoveries. However, OMCs were said to be in a constant discussion with the government and have been optimistic of a compensation on losses made on their LPG sales in FY26.