Centre plans to end upstream under-recoveries for kerosene from FY17

To reach agreement with states by January

The Union government is targeting market pricing for kerosene, on the lines of liquefied petroleum gas (LPG), from next year. It would, however, bear the entire subsidy amount on the cooking fuel which is sold through the public distribution system (PDS) of the state governments.

Reforms in kerosene pricing would also change the way this subsidy would be dispersed. Among the options being discussed by the Union government with the states, is direct transfer of subsidy into the accounts of beneficiaries. A second option on the table is that kerosene prices should be completely decontrolled, with the Centre then giving monetary support to states to enable them to sell kerosene to their beneficiaries at a subsidised rate, senior government officials told Business Standard,

MARKET PRICING

OPTION 1

• Direct transfer of subsidy into accounts of beneficiary states

OPTION 2

• Decontrolling kerosene prices; Centre giving monetary support to states to enable them to sell kerosene to their beneficiaries at a subsidised rate

This would mean upstream oil and gas companies might not have to bear any under-recoveries in kerosene from the next financial year onwards, even as, for this year, the Centre has capped its share of subsidy on the fuel at Rs 12 a litre with the remaining being borne by Oil and Natural Gas Corporation (ONGC) and Oil India. For this year, under-recoveries for kerosene are Rs 18 a litre, with the Centre bearing Rs 12 a litre, and the rest being borne by upstream companies. "The upstream companies will have to bear any additional burden irrespective of its quantum," said an official in the ministry of petroleum.

The understanding is that the income freed up by exploration and production companies would be used by them as capital spending for infrastructure projects. According to the Expenditure Budget tabled by Finance Minister Arun Jaitley in February, ONGC had in the last financial year revised its plan investment down to Rs 34,813 crore from the budgeted Rs 36,059 crore.

Jaitley had, however, said in his Budget speech, that the government and the state-owned companies would increase capital investment in infrastructure in the face of weakened private sector corporate balance sheets.

The Centre, which is working with states on ways to reduce kerosene subsidies, is confident that a way can be found on the matter by December or January of this financial year, paving the way for the decided method to be rolled out from 2016-17 onwards. "With petrol and diesel already decontrolled, and cooking gas subsidies being disbursed through direct benefit transfer, kerosene is now the next challenge for the government in terms of fuel subsidy. A solution may be reached by end of the calendar year," a senior government official said, on condition of anonymity.