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Govt re-estimating oil subsidies

P Vaidyanathan Iyer

The finance ministry is working out the cost structure of kerosene and liquefied petroleum gas.

The reason behind the exercise is to have a clear picture of oil subsidies and to examine the need for excise duty cuts after the dismantling of the administered price mechanism from April 1, 2002.

The ministry has asked the oil companies to provide it with information on their cost mechanism. Senior officials said the subsidies were likely to be revised after the basic cost structure of LPG and kerosene was obtained.

In the Budget, the government has provided a subsidy of Rs 64.95 billion. The partial rollback of LPG prices will add another Rs 7 billion to this.

The ministry feels the cost-related information of the oil companies is vital. It is important for not only assessing the subsidy amount but also deciding how often the Centre should intervene to obviate any adverse effect on the oil companies.

Top finance ministry officials told Business Standard that it had so far relied on the ministry of petroleum and natural gas for subsidy figures. "This was based on the oil pool account mechanism, now disbanded," a senior official said.

The finance ministry has asked the chief adviser (costs) to calculate the cost of LPG at the bottling plant. For kerosene, the cost at the wholesale dealer's point has been set as the base cost.

Officials said with so many bottling plants and wholesale kerosene dealers, it was important to find out the weighted cost average of LPG and kerosene at their end.

"There are about 650 kerosene dealers in the country, with variations in volumes and costs," a senior official said. Hence, the excise duty and the transport costs were added to arrive at the final retail price, he added.

"Although the administered price mechanism has been dismantled, there is not much competition. It is through the state undertakings that oil is largely canalised. Until there are more players in the market, the Centre will have to intervene from time to time," the official said.

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