Subsidy for LPG, kerosene may end next year; to boost oil companies’ profits

Subsidy for LPG, kerosene may end next year; to boost oil companies’ profits
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NEW DELHI: The government plans to stop subsidising cooking gas and kerosene next year and give direct cash support to the poor-a move that will at least double the price of domestic fuel, but wipe out revenue losses of $15 billion for state oil refiners and expose them to intense market competition in all oil products except diesel. Ending subsidies would triple the price of kerosene and double the rate for cooking gas. However, to protect the poor, the government will give them cash compensation but only to actual buyers of the fuel, government officials said on Thursday.

The new scheme, proposed to be implemented from April 1 next year, has been recommended for approval of the empowered group of ministers on fuel pricing that is scheduled to meet on June 9. Government officials said the key ministries involved in the issue have already supported the change. The government has also drawn plans to limit the cash subsidy. If a poor person gets a cooking gas connection, he will get cash subsidy for only 2 litres of kerosene a month, and even that will be withdrawn if the customer has two gas cylinders.

“The retail selling price of kerosene would be reviewed every month and aligned with the international price on an import parity basis,” a government official told ET.

The monthly subsidy payment released by the central government to states would also vary accordingly,” the official, who is involved in the decision making, said.

For state refiners such as IndianOil, Bharat Petroleum and Hindustan Petroleum , the decision would significantly boost their profitability. Between them, they would earn an additional Rs 70,000 crore in 2011-12 if kerosene and cooking gas are sold at international rates.

However, the end of subsidy will also lure private firms to the lucrative cooking gas business. So far, private firms were not in a position to compete in the market because the government subsidises sales only by state firms.

State refiners have complained about low government-set prices of fuel, but this has also helped them dominate the market. The government has already lifted controls on petrol, and has in principle freed diesel prices too. This would make the market attractive for companies like Reliance, Essar and Shell , which operate petrol pumps in the country.

Several foreign firms such as Saudi Aramco and Kuwait Petroleum Corp have said in the past they are keen to retail fuel in India, but are discouraged by the subsidy regime. Higher prices of kerosene would also discourage the use of the fuel in adulterating diesel. Industry officials say more than half the subsidised kerosene meant for lighting homes of the poor actually lands up in petrol pumps for adulteration.

Petrol and diesel prices had been decontrolled about a decade ago before the government resumed controls. During the period of decontrol, Reliance and Essar had quickly grabbed more than 15% of the retail market for transport fuel from state-run companies

Source : economictimes.indiatimes.com

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