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Union Government proposed Oil Subsidy Sharing Formula between Public Sector Oil Companies

Feb 20, 2015 09:08 IST

Union Ministry of Petroleum and Natural Gas in the first week of February 2015 finalised new oil subsidy sharing formula between the public sector oil refining companies and oil marketing companies. It finalised the new norms after consultations with the Union Finance Ministry and Chief Economic Adviser.

Under the new formula, the upstream companies or the oil refining companies’ contribution towards subsidy sharing would be as follows:

  • No contribution towards subsidy for crude oil price less than and equal to 60 dollars per barrel
  • 85 percent contribution towards subsidy for crude oil prices exceeding 60 dollars per barrel and less than or equal to 100 dollars per barrel
  • 90 percent contribution towards subsidy for crude oil prices exceeding 100 dollars per barrel

The new formula is supposed to come into effect starting from October 2015.

The new subsidy sharing formula was proposed by the Union Oil Ministry in lieu of declining global prices of crude oil and the deregulation of diesel prices in India. These two factors have changed the whole arithmetic of subsidy sharing calculations prompting the move.

Implications of the proposal

Less subsidy burden on ONGC and OIL:

Oil refining companies like Oil and Natural Gas (ONGC) and Oil India Limited (OIL) will be required to contribute less or even zero towards subsidy. That is, it will have to pay fewer rupees or nothing to the state-owned oil marketing companies (OMCs) like Indian IOC, BPCL and HPCL.

With the price of Indian crude basket at 75.17 dollars per barrel in the period October – December 2014 and the price of dollars in terms of rupee at 62 rupees per dollar, the total contribution of ONGC and OIL was 3252 crore rupees and 494 crore rupees respectively.

If the price of Indian crude basket in the rest of the year 2015 remains at the January 2015 level of 46 dollars per barrel, then the subsidy burden on ONGC and OIL would be zero. This is because, as per the proposed formula, the contribution towards subsidy will be zero if the price of crude remains below 60 dollars per barrel.

ONGC disinvestment will get a boost:

If the proposed subsidy sharing formula comes into effect, then it will pave the way for Union government to go ahead with the disinvestment process of ONGC enabling the government to earn 11500 crore rupees from 5 percent stake-sale of ONGC. Union government at present holds 68.94 percent in ONGC.

The ONGC stake sale in turn will help the government in achieving its disinvestment target of 43425 crore rupees kept for the fiscal year 2014-15.

Earlier on 30 January 2015, the government had earned a massive 24557 crore rupees from the 10 percent disinvestment of shares of Coal India Limited (CIL).

Limit fiscal deficit to 4.1 percent:

A lower subsidy bill will be a major positive for the government, which is seeking to limit the fiscal deficit within 4.1 percent of GDP in the fiscal year 2014-15, while looking for resources to step up public investment during the financial year 2015-16.

Is this article important for exams ? Yes23 People Agreed

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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