The petroleum ministry has prepared a Cabinet note seeking extension of the subsidy scheme on domestic LPG (cooking gas) and PDS kerosene for three more years till March, 31, 2010. The current subsidy scheme expires on March 31, 2007 and in the absence of an extension, the retail prices of kerosene and LPG will have to be raised sharply.

What is more significant is that the ministry wants the Budget to meet the full subsidy on these two products from the next fiscal as against the existing norm of providing it on a flat rate basis.

Assuming crude oil prices at this year’s level, the finance ministry would have to set aside about Rs 28,600 crore as subsidy on LPG and kerosene alone in Budget 2007-08. This will immediately impact the deficit targets under the Fiscal Responsibility and Budget Management Act.

At present, the government issues bonds to oil companies to partly offset their losses on sale of sensitive petroleum products — petrol, diesel, kerosene and LPG — at administered prices. For instance, on the projected under-recoveries of Rs 67,000 crore in 2006-07, the government has approved issuance of oil bonds to the tune of Rs 28,200 crore. This does not affect the fiscal deficit since there is no cash outgo.

The subsidy explicitly provided for LPG and kerosene in Budget 2006-07 stood at a mere Rs 2,930 crore, as per a scheme drawn up in 2002. The scheme froze the subsidy at 2001-02 level. Over the next five years, the government gradually brought it down and for 2006-07, the provision stood at just one-third of the 2001-02 level.

... contd.