FinMin agrees to pay pending oil subsidy bill of Rs 40K crore
New Delhi   24-May-2013

The finance ministry has agreed to pay Rs 40,000 crore of pending subsidy bill to the public sector oil marketing companies for the last fiscal but has extracted an assurance that the pricing of oil products would be reviewed by a committee constituted that will give its report within two months.

The consensus will allow IndianOil, BPCL and HPCL to announce their results soon. After over a two hour meeting chaired by Prime Minister Manmohan Singh on Wednesday, petroleum minister M Veerappa Moily was able to retain the present system of trade parity pricing for the public sector companies by claiming it would generate the surplus necessary for investments in the sector. This implies that government will stick to the current method of calculating retail prices of petrol and diesel.

On the issue of shifting to the alternative export parity pricing for diesel and petroleum, "The meeting saw a consensus between the Prime Minister, finance minister P Chidambaram and Moily that a decision should be taken after the committee under Kirit Parikh submits its report within two months," an official said.

Chidambaram has suggested that petrol and diesel to be priced at a rate they can fetch in the export market, rather than current practice of pricing the fuels after adding transportation and customs duty to the international price.

The difference between the two formulas works out to about $3 per barrel. The current method adds a 2.5 per cent customs duty to the refinery gate price of the product plus the freight rates of transporting the fuel at international prices.

The finance ministry instead wants the customs duty to be clipped back to 1 per cent and elimination of the globally linked freight charges to what is called free-on-board basis. The cost recovery calculations made on the new basis could reduce the cash outflow from the finance ministry by around Rs 30,000 crore annually.

The finance ministry will pay the backlog by clipping back from the petro subsidy numbers it had projected for this fiscal at Rs 65,000 crore in the budget. Chidambaram's ministry expects that if the new Aadhaar based direct benefit transfer scheme is introduced in the sector then the pay out for cooking gas and kerosene subsidy will be almost eliminated by the end of 2014 making the remaining current financial allocation in the budget enough to meet the balance subsidy requirements of the sector.

According to oil ministry calculations the state-run oil marketing companies have lost Rs 161,029 crore in 2012-13 for selling diesel, domestic LPG and kerosene at government controlled rates. This is more than the under-recoveries of Rs 1,38,541 crore during previous fiscal of 2011-12.

The switch is crucial for the finance ministry to keep the fiscal deficit for 2013-14 to 4.8 per cent of the GDP.

International rating agency S&P has already said India could hit a downgrade if the numbers slip.