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Govt allows oil firms to hike kerosene price every month by 25p till April 2017

14 Jul 2016 Evaluate

In order to cut the fuel subsidy burden, the government has decided to raise the price of kerosene each month for 10 months, starting with a hike by 25 paise a litre for the first time in five years on 1 July. The government has asked state-owned oil firms to revise upward kerosene price by 25 paise every month till April 2017. The proposed price hike would lower the government's subsidy burden by around Rs 1,000 crore this year.

The move will not only ensure savings on the government’s oil subsidy bill but is expected to ensure quicker payments for the downstream companies and better working capital efficiency. Kerosene accounted for 41.7 per cent of the total petroleum subsidy of Rs 27,571 crore in 2015-16. Before, the hike, PDS kerosene price of Rs 14.96 a litre was at Rs 13.12 discount to the fuel’s actual cost of production. Of the discount, the government bears Rs 12 a litre and the rest of the bill is footed by upstream oil producers like ONGC. In 2015-16, Kerosene accounted for 41.7 % of the total petroleum subsidy of Rs 27,571 crore.

Subsidy on kerosene was expected to be in the range of Rs 9,000-12,500 crore in 2016-17, assuming crude oil price of $40-50 per barrel. As per the estimates of local rating agency ICRA, the move to increase retail prices of subsidised kerosene by Rs 0.25 a litre per month for 10 months (from July 2016 to April 2017) would lead to overall reduction in gross under-recovery or subsidy by Rs 760 crore in current fiscal and Rs 2,040 crore in FY18. The upstream companies would be major beneficiaries of the reform especially at current or higher level of crude oil prices.

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