FinMin against issuing bonds to oil marketing companies

The Ministry of Finance is in favour of scrapping the practice of issuing oil bonds to government-owned oil marketing companies (OMCs).

It not only wants the Ministry of Petroleum and Natural Gas to rework the underrecovery figure for the current year but has also decided to look at the issue of oil subsidies only in February 2010, when the next Budget will be announced.

The Ministry of Petroleum and Natural Gas has sent a demand for Rs 20,871 crore worth of bonds to meet the revenue losses of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum. The companies have not got any bonds for the current year.

The government had issued bonds worth Rs 10,306 crore after the Budget in July on account of revenue loss last year. “We do want to give subsidy through the oil bond route and want to make the system more transparent,” said a senior official.

At present, the three government-owned companies are losing Rs 3.68 a litre on petrol, Rs 2.90 per litre on diesel, Rs 18.13 a litre on kerosene and Rs 250.67 on domestic LPG cylinder. 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 mechanism for oil bonds was devised in 2005-06. Bonds being in the nature of deferred payment, help the government keep the bloating oil subsidy bill off its budget. It issued oil bonds worth Rs 71,292 crore for revenue loss incurred last year. If the payment was made through a cash outgo, it could have increased the fiscal deficit, which stood at Rs 3,26,515 crore, by that much amount.

For the entire financial year, combined loss for the three companies is estimated to be close to Rs 45,820 crore, provided crude prices remain stable along with the exchange rate. The OMCs are estimated to have closed the financial year 2008-09 with underrecoveries of Rs 1,03,908 crore on subsidised sale of petrol, diesel, kerosene and LPG cylinders.