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JUL 24 2012

Govt's cash crunch hits promises to OMCs

  • Economic Times, ET Bureau / Hyderabad
  • Created: Tue 24th JUL 2012

Oil firms yet to get Rs 18,000 crore of FY12 subsidy compensation, as estimate for this year's underrecovery swells past Budget allocation

The governments tight fiscal situation is telling on its cash compensation mechanism for oil marketing companies (OMCs).

The government is yet to implement an announcement made two months earlier, on a release of Rs 17,000 crore under a tranche-based system of compensating OMC losses. This money might come to the companies in three tranches by next month.

The government had announced cash compensation of Rs 38,500 crore for the three companies Indian Oil, Bharat Petroleum and Hindustan Petroleum on May 21, to prevent them from declaring losses in their FY12 annual results. These companies declared their results towards May-end, with small profits after accounting for the cash compensation.

NO RELIEF

The government had announced cash compensation of Rs 38,500 crore for Indian Oil, Bharat Petroleum and Hindustan Petroleum in May to prevent them from declaring losses in their FY12 annual results

About 40 per cent of the cash assistance assured for last year is yet to be released to the oil marketing companies.

The three companies have a combined borrowing of around Rs 140,000 crore

The delayed release of cash is adding to the oil companies borrowing and interest cost

The three companies sell diesel, kerosene and domestic cooking gas at a government-regulated price and often at a loss. This is compensated through a cash subsidy from the government and discounts on crude oil from Oil and Natural Gas Corporation and Oil India.

However, a little more than 40 per cent of the cash assistance assured for last year is yet to be released to them. The three companies have a combined borrowing of around Rs 140,000 crore and the delayed release of cash is adding to the borrowing and interest cost. They have to resort to short-term borrowings at an interest rate of around nine per cent.

These companies are preparing to declare their first quarter numbers shortly but are yet to fully receive the subsidy assistance for 2011-12. "We had got an assurance letter of cash compensation worth Rs 20,080 crore. So far, we have got three instalments amounting to Rs 11,376 crore. We expect more cash to come in by mid-August, said an Indian Oil official. The company has borrowings of Rs 83,000 crore.

Similarly, Bharat Petroleum and Hindustan Petroleum are yet to receive compensation of around Rs 4,500 crore each. The two were promised assistance of Rs 9,000 crore and Rs 8,000 crore, respectively.

The government proposes to bring down the fiscal deficit to 5.1 per cent of the gross domestic product in the current financial year, from 5.7 per cent last year, by reining in subsidy spending. However, the under-recovery of the three oil companies on sale of diesel, kerosene and domestic LPG for the current financial year is expected to swell to around Rs 160,000 crore from Rs 138,500 crore in 2011-12, if no quick decision is made on revising the prices of these products, especially diesel, is taken. Going by the trend, the government might have to shoulder 60 per cent of the total oil subsidy this year, too, amounting to Rs 96,000 crore, while its years budget provides for just Rs 40,000 crore.

Tags

Gas Natural Gas Oil Oil Marketing Companies Petrol Petroleum Hindustan Petroleum Corporation Limited Liquefied Petroleum Gas Budget

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