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OMCs deteriorating: Kelkar commitee

The Vijay Kelkar committee has warned if oil marketing companies (OMCs) are not adequately funded against underrecoveries, they may share the fate of state electricity boards. This, the committee warned, might lead to a break in oil supply and take a toll on the banking sector.

The report was submitted before the government’s recent move to raise diesel prices by Rs 5 a litre (though only Rs 3.50 goes to oil companies, as excise duty was raised by Rs 1.50) and cap subsidised liquefied petroleum gas cylinders at six per family, per year.

In its report, the committee stated, “If OMCs are not adequately funded against their underrecoveries; there is a genuine risk analogous to the case of state electricity boards.” It stated the high debt of OMCs could lead them into a financial crisis. “This in turn, could not only cause an oil supply breakdown resulting in immense public hardships, but also adversely impact the banking system from where such debt is sourced.” When asked if the committee was exaggerating the problem, India Ratings senior director Devendra Pant said, “ if under recoveries of these companies keep on rising and the government pays part of it through subsidies, fiscal deficit widens. If the government is not able to do so, the bad debts of the banking sector will rise.”

The under recoveries of OMCs are met partly by government subsidies, partly by upstream companies and partly by raising the prices of oil products.

Of Rs 43,500 crore of subsidies estimated in the Budget, the government has already released Rs 38,500 crore towards under recovery of OMCs for 2011-12. The committee estimated that the additional burden for the government for the first three quarters of the current year would amount to Rs 51,500 crore if no steps are taken and even if international prices soften a bit.

The panel wanted the government to immediately raise the price of diesel by Rs 4 per litre, of kerosene by Rs 2 per litre and of LPG by Rs 50 per cylinder. This, together, with subsequent small steps should reduce under recoveries of OMCs by Rs 20,000 crore, the panel pointed out.

However, the recent steps by the government on fuel price corrections would lead to reduction of under recoveries by Rs 20,300 crore, according to analysts.

The Kelkar panel wanted the government to eliminate half of the diesel per unit subsidy, during this fiscal and the remaining half over the next fiscal year. It recommended eliminating the LPG subsidy by 2014-15 by reducing it by 25% this year and the remaining 75% in the next two fiscal years.

“For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15." The government has already rejected the Kelkar panel’s recommendations on subsidies, saying vulnerable population needs to be protected.

OMCs have reported under recoveries to the tune of Rs 47,811 crore in the first quarter of this fiscal. However, falling crude oil prices and the rupee appreciation against the dollar is expected to give relief to OMCs.

Pant said appreciation of the rupee also happened due to the measures announced in fuel price corrections. What happened in the ground? FDI in retail sector has not come so far, it is mainly fuel price corrections that have given the boost to sentiments which is augmenting capital inflows into India, leading to appreciation of the rupee against the dollar.

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