India State Oil Retailers receive subsidy for keeping last years fuel prices down

The fuel retailers sell gasoline, diesel and cooking fuels at government-mandated discounted prices to help tame inflation. Gasoline prices were deregulated from June 26, but diesel and cooking fuel prices continue to be controlled by the government.

The federal government shares the losses that fuel retailers incur on the sale of discounted cooking fuel through cash subsidies. Upstream companies--Oil & Natural Gas Corp., Oil India Ltd. and GAIL (India) Ltd.--share in the losses of marketing companies on gasoline and diesel sales through discounts on crude oil and products.

The profitability of the oil retailers significantly depends on how much of their revenue loss is compensated by the government. However, subsidies are often delayed and the frequency of payment is uncertain.

The oil companies had gross under-recoveries of 460.51 billion rupees in the financial year ended March 31 and the government approved a cash subsidy of 260 billion rupees. Of the approved amount, 120 billion rupees was released earlier and 140 billion rupees has just been released to the oil marketing companies, Mr. Sundareshan said.

BPCL received 29 billion rupees in the past year as its share of cash compensation from the government, its spokesman said separately. "The subsidy was promised by the government for last year and we got it on Friday," the spokesman said.

Executives at Indian Oil and HPCL did not comment.

The government in June raised fuel prices to reduce its subsidy burden, cut losses for oil companies, help fiscal consolidation so that more funds could be allocated to social projects and secure energy resources by diverting funds from subsidies to development projects. It lifted state control on gasoline prices and said diesel prices would eventually be market-driven as well, but didn't specify when.

The oil companies expect their profits to rise, borrowings to fall and expansion projects to receive a boost after the partial deregulation. The impact on earnings is expected from the current quarter onwards.

Although the oil ministry has said the government will bear at least half of the losses of state-run marketing companies for this financial year, it is yet to give specific numbers.