The Centre has indicated that it would consider giving direct cash subsidy to state-owned oil marketing companies this year, instead of bonds, to compensate them for selling cooking fuel at lower than market price.
Finance Secretary Ashok Chawla told reporters today that the proposal was being examined. "It is under consideration. The decision will be taken at the highest level," he said, adding, "tentative thinking is that, we will give them cash before March 31."
Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation will end up reporting losses during the current quarter if they do not get a commitment from the government on the subsidy, whether in the form of oil bonds or cash, before January-end.
The ministry of finance skipped the provisioning for oil bonds in the supplementary to the Budget that was approved by Parliament last week. "We do want to give subsidy through the oil bond route and want to make the system more transparent. We also do not agree with the oil companies' calculations of underrecoveries," a finance ministry official had earlier told Business Standard.
A decision on how to handle the subsidy is expected to be taken only after an expert committee led by Kirit Parikh, former (member), Planning Commission, submits its report. "The report is late and is expected January-end," said a senior official in the ministry of petroleum.
The official said there were two options available to the government -- give in-principle letter of approval for either bonds or cash subsidy, which the oil companies would account for in their third quarter results. "The parliamentary approval can be taken post facto at the time of Budget presentation in February," he added.
Petroleum Minister Murli Deora at the recent meeting of Parliamentary Consultative Committee of MPs said, "We have requested the finance ministry to issue oil bonds of Rs 20,871 crore (Rs 208.71 billion) to compensate the OMCs' under-recoveries on PDS kerosene and domestic LPG for the first three quarters of the current financial year, but are yet to receive the same. The delay is reflecting on their financial performance."
If the government decides to grant cash subsidy, the outgo will reflect on its budget. Unless it makes savings to that extent from its existing expenditure, it will bloat its borrowings by more than Rs 20,871 crore since this figure is only for three quarters of the current year.
Oil companies, on their part, prefer cash subsidy since they sell oil bonds below par.
While stating that nothing has been officially conveyed to them, IndianOil (director), Finance, S V Narasimhan, said, "Normally cash is a better proposition than bonds, since it is instant liquidity. We are pursuing with the ministry of finance and the petroleum ministry to take a decision before we close our accounts in January," he said.
For the second quarter of current year, IndianOil reported a profit of Rs 284 crore (Rs 2.84 billion). Both Bharat Petroleum and Hindustan Petroleum reported losses of Rs 159 crore (Rs 1.59 billion) and Rs 137 crore (Rs 1.37 billion), respectively.
The government issued Rs 10,306 crore (Rs 103.06 billion) bonds post July Budget on account of revenue loss last year.
While Oil and Natural Gas Corporation, GAIL India and Oil India Ltd compensate OMCs for losses on diesel and petrol, the government was to issue bonds to oil companies for losses incurred on selling LPG and kerosene below the market price.
The gross combined loss of the domestic industry on sale of petrol, diesel, kerosene and LPG is expected to be over Rs 45,800 crore (Rs 458 billion) in the current financial year.
The mechanism for oil bonds was devised in 2005-06. Bonds, being in the nature of deferred payment, helps the government keep the bloating oil subsidy bill off its budget.
For instance, oil bonds worth Rs 71,292 crore (Rs 712.92 billion) were issued for revenue loss incurred last year. If the payment was made through a cash outgo, it could have increased the fiscal deficit, that stood at Rs 3,26,515 crore (Rs 3,265.15 billion) during 2008-09, by that much amount.
