Home > Crude Oil & Petroleum > Fuel subsidy in India to be capped

Fuel subsidy in India to be capped

In spite of de-regulating petrol prices and partially de-regulating diesel prices in India, under-recoveries on other fuels are very high. This is draining the government as well as the petroleum-oil companies. However, the government plans to cap its share of losses.

Until recently, four petroleum products in India were sold at government-determined prices. These were petrol, diesel, kerosene (for PDS) and LPG (for domestic use). These prices were way below prevailing market prices, leading to significant under-recoveries (or losses).

Under-recoveries were shared in the ratio of one-third each by the Centre, oil exploration companies (including ONGC & Oil India) and refining companies (such as IOC, HPCL & BPCL).

During FY10, total under-recoveries stood at Rs 46,051 crore. Of this, the government gave a cash subsidy of Rs 26,000 crore. According to ministry sources quoted by the Times of India, during the first quarter itself they had expected the three oil refining companies to record a loss of Rs 79,670 crore in 2010-11. This is in spite of deregulating petrol prices.

Now, to check the widening fiscal deficit, the government plans to cap fuel subsidy at last year’s level — which was Rs 26,000. This is way below the expected losses this year. Also, benchmark crude oil prices are nearly 20-22% higher than during April-August 2010 compared to the year-ago levels. This proposal is expected to result in huge losses for upstream (exploration) and down-stream (refining & marketing) companies.

With regards to petrol price being market driven, it must be noted that diesel accounts for over 50% of the total fuel consumption. And diesel prices are not totally market driven. Also, fuel subsidy on LPG and kerosene is still a huge burden on the oil companies.

Categories: Crude Oil & Petroleum
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