Interim Budget likely to slash petro subsidies

NEW DELHI: It could turn out to be a double whammy for the petroleum sector — the FM’s interim Budget is poised to prune petro-subsidies on two fronts. However, the oil ministry may prevent the resulting price increase from being passed on to consumers. This may hit oil companies where it hurts most — the bottomline.
Budgetary provisions for subsidies on cooking gas and kerosene, the two subsidised petro-products, may be slashed by almost Rs 2,000 crore in the Budget. This is in line with the subsidy reduction plan already in place. The finance ministry may also do away with the budgetary provision to compensate oil marketing companies for taxes, which they bear but are unable to recover from retail sales. The budgetary head for irrecoverable taxes is meant to cover levies like entry tax, central sales tax (CST) and turnover tax.
Both these moves may affect the profits of oil companies adversely. With the removal of the provision for irrecoverable taxes (Budget ‘03-04 provided for Rs 1,530.5 crore), oil companies will now have to bear these levies. Given the competitive price regime, they may be unable to pass on these levies to customers. Bulk importers like Essar escape any CST. The government had provided a flat subsidy of Rs 4,495 crore in ‘02-03 for kerosene and cooking gas. This translates to a subsidy of Rs 47 per cooking gas cylinder and Rs 2.4 per litre for kerosene.
With the likely subsidy cut, the government may provide for a subsidy of only Rs 23.5 per cylinder and Rs 1.2 per litre of kerosene. But, this may not translate to hike in the retail prices of these products.
Given an election year, when populism is the buzzword, it would be difficult for oil companies to get the government’s permission to hike retail prices. The Cabinet had decided to freeze retail prices of these two products till March 31, ‘04.
This is expected to hit the profit of oil marketing companies, estimated to incur a loss of Rs 5,700 crore on the sale of cooking gas and LPG in ‘04. In a move to provide some relief to the oil marketing companies, the government has directed ONGC and Gail to pick up a part of the tab, totalling Rs 1,900 crore. This policy is applicable only for the current fiscal.