Govt set to cap fuel subsidy at last year’s outgo

NEW DELHI: The government plans to limit its share of fuel subsidy payout to last year’s levels despite higher losses this year, a move that could result in a significant drop in profits for domestic oil companies.
This would require oil marketing companies IOC, HPCL and BPCL to absorb a substantial portion of the losses incurred in selling petro fuels below cost.

“It (petroleum subsidy) is expected to be close to that of last year,” a finance ministry official said, adding the borrowing plan for the second half of the year was decided after fixing the fuel subsidy outgo.

A part of the subsidy will be paid by government-owned oil producing companies ONGC and OIL. The finance ministry will pay its share of subsidy compensation in cash.

Subsidies, referred to as under recoveries in industry parlance, is equivalent to the loss suffered by the oil marketing companies for selling fuel at government controlled prices.

In 2009-10, the government agreed to bear only Rs 26,000 crore of the total under recovery of Rs 46,051 crore. The total subsidy bill is estimated to be in the region of Rs 53,000 crore this year, higher by almost Rs 7,000 crore from last year’s figure, due to higher crude oil prices.

Despite a partial decontrol of fuel prices, whereby oil companies are allowed to fix petrol prices, the bulk of the losses still remains as diesel, cooking gas and Kerosene continue to be sold at a loss. Diesel, which constitutes almost 45% of the total fuel consumption, accounts for a large portion of the losses.

While upstream oil companies ONGC and OIL India forked out Rs 14,430 crore as subsidy liability, oil marketing companies had to absorb Rs 5,621 crore losses on their books.

The finance ministry’s decision makes it clear that both upstream and downstream companies have to budget for higher subsidies, which will impact their bottom lines.

Government-run fuel retailers IOC, HPCL and BPCL recorded losses in the first quarter of the current financial year as they are yet to get compensated by the government.

ONGC reported 24% lower profit in the first quarter at Rs 3,661 crore. The company paid Rs 5,515 crore in subsidies in the first quarter as against Rs 429 crore in the year before. The results for the first half in 2010-11 will depend on whether the government pays out the subsidy compensation in time.

A final decision on the sharing of subsidy burden between the stake holders — the government, oil marketing companies an upstream companies — will be taken by the empowered group of ministers, or EGoM.

The finance ministry is keen to settle the concerns over subsidy sharing soon so that it can move ahead with the proposed sale of shares in ONGC and Indian oil. The oil ministry is seeking a transparent mechanism, not an adhoc allocation, of subsidies.

“The government has to evolve a transparent mechanism to compensate oil PSUs before IOC and ONGC issues,” an oil ministry official said. The follow-on public offers of IOC and ONGC are expected to hit the market in the current fiscal year.

The government’s recently announced borrowing plan for the second half of the current fiscal will see it borrowing Rs 10,000 crore less than the budgeted Rs 4,57,000 crore for the year.

“Our borrowing plan for the second half has assumed the worst case scenario for oil subsidy,” the finance ministry official said, indicating that subsidy amount is unlikely to change.

The government has paid oil companies Rs 26,000 crore in 2009-10. Unlike earlier years, the entire subsidy was paid in cash.