Relief for ONGC, Oil India, GAIL as govt to foot entire fuel subsidy bill

Starting this fiscal, the government will bear the entire fuel subsidy burden, doing away with the practice of shifting part of it to upstream oil companies. The move, enabled by the steep decline in under-recoveries since FY15 due to the global oil price decline, the decontrol of petrol and diesel and cut in LPG subsidy, would boost the bottom lines of ONGC, Oil India and Gail India, and make them more attractive to investors.

After freeing of prices of petrol in FY11 and diesel in FY15, the Centre picked up the entire subsidy on domestic cooking gas from FY16. Sources said starting this year, it will also bear the entire public distribution system (PDS) kerosene subsidy burden, freeing oil producers from the onus.

Upstream oil companies’ subsidy burden had seen a huge decline from 56% in FY15 to 7% FY16. Budget FY17 provides Rs 26,947 crore for fuel subsidy in the current fiscal: Rs 19,803 crore for LPG and Rs 7,144 crore for kerosene. The budgeted outlay, sources said, would more or less suffice to meet the actual subsidy requirement, although the government may have to find a few thousand crores to pay the arrears from the previous fiscal. Of course, the option of rolling over a small amount, without affecting the fiscal maths, was there, they added.

“The oil companies won’t have to pay anything for subsidising kerosene this year. Simultaneously, steps will be taken to ensure that only the deserving people get the subsidy,” a senior government official said.

States get about 87 lakh kilolitres of kerosene annually under PDS, 20 lakh kilolitres more than required as per National Sample Survey Organisation (NSSO) 2011-12 data, the official said. By aligning NSSO data to kerosene consumption and PDS demand, states could be allocated PDS kerosene depending on actual consumption. The savings on account of plugging of leakages would be shared with the states. States will get 75% of the savings in the first two years (from FY17), 50% in the third year and 25% in the fourth year.

The Centre’s subsidy share in kerosene was about Rs 9,200 crore in the year while upstream oil firms paid Rs 1,980 crore.

In the past, investors had frowned upon the subsidy burden on oil explorers. The latest move on subsidised kerosene would increase the attractiveness of these companies to investors. Lack of transparency and clarity on subsidy sharing has played a part in delaying the proposed disinvestment of 5% government stake in ONGC.

According to a formula adopted last year, the Centre was paying Rs 12 per litre subsidy on kerosene under PDS while under-recoveries over and above that was largely borne by oil explorers — ONGC, Oil India and Gail. Officials estimate the subsidy on the fuel to be between Rs 7,000 crore and Rs 8,000 crore this fiscal, depending on ability of the government to effect a 25 paise per litre hike every month. It has already raised kerosene prices in July and August.

The subsidy on kerosene is likely to be lower in the current fiscal even after fully absorbing the under-recoveries on the fuel as crude prices have declined significantly in the past one year. The under-recoveries in kerosene by OMCs is now about Rs 11.50 a litre.

Separately, the government is also trying to replicate the success of DBT-LPG in delivering kerosene subsidy as well. A system will be in place by end-FY17 linking biometric details of beneficiaries to a computerised system to weed out bogus consumers. DBT-LPG (linked to Aadhaar/bank accounts) saved the exchequer Rs 21,261 crore in FY15 and FY16 by plugging leakages.