Government oil subsidy bill to be cut by over 60 per cent in FY’15

New Delhi: With international oil prices dropping to multi-year low, government's oil subsidy bill is likely to be slashed by over 60 per cent in the current fiscal.

The government currently controls diesel, domestic LPG and kerosene and prices them at rates below cost. The losses oil firms thus incur are made good by way of cash subsidy and asking upstream oil producers like ONGC to give discounts.

In 2013-14, the government provided Rs 70,772 crore by way of cash subsidy while upstream firms picked up Rs 67,021 crore tab. With oil prices dropping to four-year low of less than USD 84 per barrel, the under-recovery or revenue loss arising out of selling diesel, domestic cooking gas (LPG) and kerosene at prices lower than imported cost this fiscal is estimated at Rs 86,080 crore.

This is lower than Rs 1,39,869 crore gross under-recovery last fiscal, industry and government sources said. Sources said the under-recovery in the first quarter (April-June) was Rs 28,691 crore. This was mostly met by Rs 11,000 crore cash subsidy from the government and Rs 15,547 crore coming from ONGC, Oil India Ltd (OIL) and GAIL.

The remaining Rs 2,144 crore was absorbed by fuel retailers (IOC, BPCL and HPCL). In second quarter, the under-recovery is estimated at Rs 21,198 crore with diesel accounting for Rs 2,848 crore as compared to Rs 9,037 crore in the June quarter.

Kerosene under-recovery was Rs 6,950 crore (Rs 7,524 crore in Q1) and LPG was Rs 11,400 crore (Rs 12,129 crore in Q1). With diesel under-recovery being wiped out last month and fuel retailers in fact making a profit of over Rs 2 a litre, the share of nation's most consumed fuel in overall under-recovery for 2014-15 fiscal will be just Rs 12,189 crore.

Sources said the government has not account the cash subsidy and upstream share for Q2. While the government had deregulated or freed petrol prices in June 2010, diesel prices have been raised by up to 50 paisa a litre every month since January 2013.

The hikes together with a sharp drop in international oil prices have helped wipe out the under-recovery or loss on diesel. Currently, oil firms are making Rs 2.25-2.50 a litre profit on diesel, which should have been passed to consumers in form of a price cut but the same has been postponed due to assembly elections in Maharashtra and Haryana.

Oil firms lose Rs 31.22 a litre on kerosene and Rs 404.64 per 14.2-kg LPG cylinder. Sources said the government had provided Rs 1,00,000 crore cash subsidy in 2012-13 when under-recoveries touched an all-time high of Rs 1,61,029 crore.

In the preceding year, it had provided Rs 83,500 crore. Upstream firms had chipped in Rs 60,000 crore in 2012-13 and Rs 55,000 crore in 2011-12.