The government is likely to extend the subsidies on LPG and kerosene by two more years to 2007 as the Rs 20 per cylinder hike in prices and halving of the excise duty were not enough to cover the cost.

Subsidies on LPG and kerosene, estimated at Rs 3,500 crore (Rs 35 billion) for 2004-05, were to be eliminated from the next fiscal, but the oil package formalised on Tuesday indicates that the budgetary support for the two products may be extended to 2007.

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"A formal announcement on this is likely to be made on July 8 when the Union budget would be presented," government sources said.

Announcing the hike in prices of LPG and auto fuel last evening, Petroleum Minister Mani Shankar Aiyar had said: "The subsidies for LPG and kerosene will continue in 2004-05. But the original Cabinet decision was to phase out the subsidies in 3 to 5 years. So, in principle it is possible to have subsidies for another two years."

Sources said the Rs 22.58 per cylinder subsidy on LPG budgeted in the Interim Budget for 2004-05 is likely to be enhanced to about Rs 40 in the full Budget and that on kerosene to Rs 1.10 per litre from Rs 0.81 per litre budgeted.

The public sector oil firms were incurring huge losses on selling LPG and kerosene, as they were not allowed to revise prices since April 2002 despite a spurt in the cost of raw material (crude oil).

"The Rs 20 per cylinder hike and excise duty on LPG being cut to 8 per cent from 16, are not enough to cover the Rs 133 under-recovery per cylinder and so subsidy will have to be enhanced," they said.