Cash-strapped government questions oil subsidy bill

Cash-strapped government questions oil subsidy bill

New Delhi: India is taking a closer look at its fuel subsidy costs by questioning the low refining margins of its state-run oil firms, a government source said on Wednesday, signalling a veiled threat of cuts that could hurt the companies’ profits.

Such scrutiny comes at a time when the government is struggling with a slowing economy that makes it difficult to meet a 2011-12 fiscal deficit target of 4.6% of gross domestic product (GDP). Growth in revenue receipts is also expected to slow. In response, the government is trying to tighten its spending on subsidies. Fuel subsidy accounted for about 3.4% of the central government’s spending in 2010-11.

The finance ministry, upping the ante to cut costs, is scrutinizing oil firms’ subsidy claims, a senior source involved in payment of fuel subsidies told Reuters.

“With the same input and output price, if one refinery is getting $12 per barrel as refinery margin, then why are our companies getting only $3 to $4 per barrel?" the source said, comparing margins of Indian state-owned companies with those of private ones at home and abroad.

“Where is the balance $8 going? This is a question of efficiency," said the source.

Privately run Reliance Industries Ltd’s gross refining margins in the last fiscal averaged at $8.4 a barrel, while state-run Indian Oil Corp. Ltd’s averaged $5.95, a disparity analysts said underlined the need to improve efficiency.

“Low profit margins of public sector oil companies are a reflection of inefficient operations," said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy, a Delhi-based think tank. “There is a need to restructure the (state) firms through better employment of technology, capital and labour to bring down the oil subsidy bill."

Indian refiners have invested 32,000 crore since April, 2009, to install new units and upgrade existing secondary ones to improve fuel quality without much changes to their crude slate.

India’s state-run oil marketing firms have estimated revenue losses of around 20,900 crore during July-September on account of selling oil products below market price to respect government caps.

The government has promised 15,000 crore as compensation to oil marketing companies for their first quarter revenue losses. An additional help of 49,000 crore for the current fiscal through tax cuts was announced earlier this year.

And with higher diesel and cooking gas prices and deregulated petrol prices, the oil subsidy bill was likely to be contained, the source said.

“So how could under-recoveries become 1.2 trillion for the year that everyone is talking about?," the source said, adding that due to fiscal constraints, the ministry would be more stringent this year in considering any additional demand for subsidy.

The finance ministry gave 41,000 crore as oil subsidy in 2010-11 to state-run oil marketing firms.

Nidhi Verma contributed to this story.