Oil subsidy sharing scrapped for 2015-16

After a prolonged delay, the Narendra Modi government has decided to scrap the fuel subsidy-sharing mechanism and bear the entire burden of the state-owned oil marketing companies for 2015-16. This would make divestment of Oil and Natural Gas Corporation (ONGC) attractive and could quicken the process as investors have often raised queries over subsidies.

Although the move is likely to increase the Centre's combined liquefied petroleum gas (LPG) and kerosene subsidy burden by Rs 10,000 crore, it will improve the bottom lines of exploration and production companies such as Oil India, ONGC and GAIL.

"The decision was taken today in a meeting that was headed by Finance Minister Arun Jaitley and attended by Oil Minister Dharmendra Pradhan," a senior government official said on Thursday. "The move is to quicken disinvestment in oil companies," the person added.

Jaitley had budgeted fuel subsidy at Rs 30,000 crore for this financial year. The official said it could now go up to as much as Rs 40,000 crore but did not elaborate on how the government planned to fund or free up fiscal space for the additional sum.

The government's plan to completely exempt upstream oil companies from the subsidy burden in 2015-16 might turn out to be too ambitious.

The official also did not give details on how the Rs 40,000-crore projected burden would be shared between kerosene and LPG. Currently, of the budgeted Rs 30,000 crore for subsidy, Rs 22,000 crore (73.3 per cent) is earmarked for LPG and Rs 8,000 crore (26.7 per cent) for kerosene.

Going by that, the amount earmarked for LPG could go up to Rs 29,320 crore, while for LPG it could be about Rs 10,680 crore. However, any major increase in global crude oil prices could disrupt the Centre's calculations during the year. For the Budget, the policymakers had assumed an average oil price of $70 a barrel.

The five per cent stake sale of ONGC, originally part of the 2014-15 divestment road map, was deferred because of low global oil prices and uncertainty among investors over the company's earning prospects pending the proposed new subsidy-sharing mechanism.

A five per cent stake sale at current market prices will fetch the Centre about Rs 13,000 crore.