Reeling under a financial crunch, the finance ministry is considering a change in the methodology for calculating the under-recoveries of oil marketing companies (OMCs). The ministry is hopeful of a lower fuel subsidy bill, if the methodology is changed. A decision in this regard is likely in the next two weeks.
According to the existing trade parity price method, OMCs are estimated to post a notional loss of about Rs 1,63,000 crore this financial year for selling fuel below the price prevailing in the international markets. The petroleum ministry has asked the finance ministry to pay Rs 1 lakh crore while upstream oil companies such as ONGC, OIL and OMCs would share the rest of the burden.
“We have asked the petroleum ministry to revisit the methodology used for calculating under-recoveries. We want to ensure that we are not over compensating them,” said a finance ministry official. The official agreed the subsidy demand might come down under the new methodology and added a decision on this was likely in a fortnight.
Under-recoveries in the first six months are Rs 85,586 crore. The finance ministry has so far given Rs 30,000 crore towards oil subsidy for this year. The oil ministry is asking for the balance Rs 70,000 crore, but the finance ministry is not in a position to spare that much as it is trying to restrict the fiscal deficit to 5.3 per cent of the GDP this year.
OMC under-recoveries, the difference between the desired price and actual selling price, have been a matter of debate. A mechanism using the actual cost of production at the refinery was prevalent before 2002, against the trade parity price mechanism used now.
However, studies conducted by the finance ministry in the past show there is not much difference in the amount of under-recoveries computed through these two methods. A report of the expert group headed by Kirit Parikh in 2010 had also suggested continuation of the extant methodology based on import parity pricing as long as the country was a net importer of these fuels.
OMCs are currently incurring daily under-recovery of Rs 389 crore on the sale of diesel (Rs 9.03 per litre), PDS kerosene (Rs 30.64 per litre) and domestic LPG (Rs 490.5 per cylinder). For this reason, the petroleum ministry is pushing for a hike of Rs 10 in diesel prices over the next 10 months. It is calling for a similar hike in kerosene prices over the next two years. Diesel prices were last increased in September by about Rs 5 per litre, while kerosene rates have not been changed since June last year.