Govt to pay up to half of fuel subsidy

Govt to pay up to half of fuel subsidy

Panipat: Government will now cover up to half of the subsidy outgo of state-run oil companies from selling fuels at rates that are below cost, as their losses mount with crude staying above $100 a barrel.

The subsidy, also referred to as under-recoveries, could reach as much as 1 trillion, oil minister S. Jaipal Reddy said, higher than a 75000 crore estimate by the head of Indian Oil .

India currently has an informal system where the government has compensated state-owned oil marketing firms for 30% of the cost of selling fuels such as gas oil and cooking fuels including liquefied petroleum gas and kerosene at rates set by the government.

Fuel marketing companies “are facing increasing under recoveries," Jaipal Reddy said, while inaugurating Indian Oil’s naphtha cracker in the northern city of Panipat. “Global crude oil prices have started to go up. At the moment, we are not thinking of increasing commodity prices."

The move by the government to formalise the arrangement and pay a greater share would raise the burden on the country’s finances but could all state-run oil companies recoup a higher portion of the losses from selling below the cost of production.

Tackling the current informal structure of fuel subsidies would help investors put a better valuation on proposed share sales for Indian Oil Corp (IOC) and Oil and Natural Gas Corp , aimed at bringing in more revenues for the government.

The government also makes oil explorers such as ONGC bear a third of the revenue losses.

With inflation among the highest of major world economies and the government embroiled in a slew of corruption cases ahead of key state elections this year, raising diesel and other fuel prices appears highly unlikely.

One option that the government may consider is to slash duties on crude and refined petroleum products to ease the burden of state-run oil companies that are forced to sell diesel and cooking fuels at below market rates.

Last month, then oil minister Murli Deroa said he hoped the finance ministry would roll back customs and production taxes slapped on petrol, diesel and crude oil in last year’s budget.

That budget was passed when global crude oil prices were about half current levels.

In his last budget, finance minister Pranab Mukherjee had restored customs duty of 5% on crude petroleum, 7.5% on diesel and petrol, and 10% on other refined products, that were withdrawn in 2008 when the international price of Indian crude basket touched $112 a barrel.

Mukherjee had also enhanced the excise duty on petrol and diesel by 1 rupee per litre each in his last budget.

Finance ministry officials earlier said any new duty review would be undertaken in the federal budget, scheduled to be presented on 28 February.