The Hindu : Oil companies seek compensation for slashing LPG, kerosene subsidy

Online edition of India's National Newspaper
Thursday, Feb 05, 2004

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Oil companies seek compensation for slashing LPG, kerosene subsidy

By Sushma Ramachandran

NEW DELHI, FEB. 4. The oil marketing companies affected by the slashing of subsidy on liquefied petroleum gas and kerosene are believed to have urged the Government to provide compensation for the additional burden of about Rs. 9,000 crores in the next financial year.

The interim budget has nearly halved the subsidy on LPG and kerosene from Rs. 6,573 crores in the current fiscal to Rs. 3,560 crores in 2004-05. Since consumer prices are not being raised the subsidy will be borne by the oil companies clearly impacting their bottomline next year.

The affected oil companies are the Indian Oil Corporation, which will bear over 50 per cent of the Rs. 9,000 crores of "under-recoveries" as these are described, the Hindustan Petroleum Corporation Limited (HPCL), the Bharat Petroleum Corporation Limited (BPCL) and the IOC's subsidiary, IBP. Companies engaged only in oil refining, including the private sector Reliance Industries Limited (RIL), have been kept out of the ambit of the subsidy burden, which is confined to oil marketing companies. Incidentally, RIL is the largest LPG producer.

Official sources say these companies have now urged the Petroleum Ministry to extend the compensation scheme introduced in the current fiscal to 2004-05. Otherwise, the four companies would have to carry a huge burden of under-recoveries on sales of LPG and kerosene.

In the current year, the Government decided to provide some relief to the oil companies by dividing under-recoveries due to LPG and kerosene between the IOC, the Oil and Natural Gas Corporation and the Gas Authority of India Limited. The ONGC and GAIL took on the burden of Rs. 1,100 crores of under-recoveries leaving the bulk of Rs. 2,200 crores to be shouldered by the IOC and the balance to be absorbed by the exchequer.

The compensation scheme enabled the IOC to boost profitability enormously and its latest third quarter results showed a 31 per cent rise in net profits.

In the next financial year, however, the scenario will be substantially different unless the Government agrees to give some compensation to these oil companies.

This is despite the fact that the oil companies are supposed to be operating in a deregulated environment with the dismantling of the administered pricing mechanism. Apart from this burden, the companies have given interim dividend to shore up the fiscal deficit this year, boosting non-tax revenues by Rs. 2,500 crores in the interim budget.

Industry sources are not sanguine about expectations that the burden will be passed on to the consumer after the elections. They point out that for the past year, the subsidy has been contained by the oil companies and do not expect a new government to immediately take the unpleasant step of raising LPG and kerosene prices. The present subsidy on LPG is Rs. 45.17 for an LPG cylinder and Rs.1.63 for a litre of kerosene. This has been brought down to Rs. 22.58 and 81 paise respectively for 2004-05 with the latest subsidy cut.

The reason given for the sharp decrease in subsidy on these two products in the interim budget is that it "is in conformity with the decision to phase out petroleum subsidy over a period of time."

The subsidy bill for 2003-04 was Rs. 8,116 crores and this was brought down to Rs. 6,573 crores in the revised estimates and slashed to Rs. 3,560 crores for 2004-05.

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