UPA’s rural push may increase fuel subsidy

UPA’s rural push may increase fuel subsidy
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First Published: Wed, Jun 17 2009. 11 35 PM IST

Updated: Wed, Jun 17 2009. 11 35 PM IST
New Delhi: The Union government may announce a budgetary subsidy to oil marketing companies, or OMCs, to help them cover the losses they will have to bear on account of a new scheme to sell liquefied petroleum gas, or LPG, to a much larger base of rural consumers.
The Gramin LPG Vitrak scheme has been identified as a priority in the first 100 days of the government by petroleum and natural gas minister Murli Deora. The scheme is meant to promote LPG use in those rural areas that cannot be viably serviced due to the current LPG distribution policy.
“The finance ministry will be putting something in this budget for the subsidy increase that this scheme will entail,” said a senior Union cabinet minister, who did not want to be identified. The development could not be independently confirmed from the finance ministry.
If the proposal is accepted and the scheme expanded to cover more households, then the subsidy burden of the OMCs, which are already struggling because they are forced to sell petrol and diesel at a loss to domestic consumers, could be under further pressure.
OMCs such as Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd sell LPG at prices fixed by the government and currently lose Rs68.82 per 14.2kg LPG cylinder. The under-recoveries for OMCs were Rs1.03 trillion in 2008-09, of which Rs17,761 crore was because of LPG sales. With the crude oil prices at $70.28 (Rs3,366) per barrel (on Tuesday), the OMCs are expected to post a loss of Rs40,000 crore in the current fiscal. According to the petroleum ministry, the Gramin LPG Vitrak scheme would be launched by August at locations having potential of up to 1,000 refills per month. Currently, LPG distributorships are set up in towns and villages having a population of 5,000 and potential of 2,500 refills per month, considering the population within 15km from a town or village.
“The scheme was part of the discussions that petroleum minister Murli Deora had with finance minister Pranab Mukherjee on Monday. The issue of increase in the subsidy was also discussed. We expect something to this effect in the budget,” said a senior petroleum ministry official who did not want to be named.
At present, there are about 9,350 LPG distributors in the country serving a population of 10.6 crore LPG customers. Of these distributors, about 25% are serving rural areas. The rate of LPG growth in the country is around 4% per annum.
First preference:Murli Deora has identified Gramin LPG Vitrak scheme as a priority in the first 100 days of the government. Pankaj Nangia / Bloomberg
“With the introduction of the new scheme, the overall subsidy burden may be partially offset as the kerosene quota to the extent of coverage in the rural areas will go down. It will also reduce the availability of fuel for diversion for adulterating diesel,” said a government official who did not want to be named.
“Although the subsidy burden will go up, this scheme will help replace kerosene in the long run,” said Sarthak Behuria, chairman, IOC, which has the maximum number of 5,000 LPG distributors in the country.
The other announcements, according to the same petroleum ministry official, expected in the budget include tax holiday for natural gas production, which is key to attracting overseas bidders to India’s biggest auction ever of 70 oil and gas blocks. Lack of clarity on the issue prompted the government to defer roadshows that were to start in April to revive investor interest in the auction, the eighth round of the so-called New Exploration Licensing Policy, or Nelp.
The budget may also attempt to address the vexed issue of petroleum product pricing on account of rising subsidy bill. Deora had earlier said that policy decisions in this context will be taken shortly.
“Deregulation option is still there. Nothing is off the agenda,” said the same official.
“After a long time, the government is in a position today to take some hard measures, particularly when it comes to long-standing issue which previously may have been largely influenced by populism. Gramin LPG Vitrak scheme is a good initiative. However, the government must ensure that it has given careful attention to monitoring framework, with respect to the transition from kerosene to LPG,” said Monish Chatrath, national market leader, at consultancy Grant Thornton India.
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First Published: Wed, Jun 17 2009. 11 35 PM IST
More Topics: Budget 2009 | UPA | Sector wishlist | Fuel | Subsidy |