Government plans major payout to offset LPG losses

The government is likely to compensate state-run oil firms — IOC, BPCL, and HPCL — with Rs 30,000–35,000 crore for LPG under-recoveries over the last 15 months. The compensation may be funded through additional revenue from the recent excise duty hike

New Delhi:The government is likely to give a subsidy of Rs 30,000-35,000 crore to state-run oil companies – Indian Oil Corporation (IOC), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL) – to compensate for losses incurred from selling LPG at below cost over the past 15 months, according to a senior official.

The Finance Ministry is working out the exact under-recovery or loss incurred and the mechanism to compensate it, he said. In the Union Budget for 2025-26 fiscal (April 2025 to March 2026) presented on February 1, the government has made no provision to compensate for the under-recoveries. However, in April, the government raised excise duty on petrol and diesel to garner additional Rs 32,000 crore in revenues.

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This additional revenue is what the finance ministry may use to compensate for LPG under-recoveries. “Oil marketing companies (OMCs) are part of the Government family. Compensation will happen. We are evaluating how much is under recovery and looking at the modalities for compensating them,” the official said.

Prices of domestic LPG are regulated by the government to insulate domestic households from high market rates. Regulated prices are lower than the Saudi CP – the international benchmark used to price domestic LPG. This is because domestic LPG production is not sufficient to meet the local demand and the fuel has to be imported.

This leads to under-recoveries and consequent losses to the fuel retailers. The total under-recovery on LPG sales for the industry in the 2024-25 fiscal year is estimated at about Rs 40,500 crore. Alongside the excise duty hike, retail LPG rates too were hiked by Rs 50 per 14.2-kg cylinder. This helped narrow the gap between the cost and the retail selling price, reducing the under-recoveries in the current fiscal.

Previously, the government was toying with the idea of providing Rs 35,000 crore in LPG subsidy in total spread over two financial years. The official further said that they are evaluating the modalities of how the collections from the recent excise duty hike are to be routed into the compensation amount.

Asked if the compensation to OMCs would be routed through the consolidated fund of India, the official said, “Yes, broadly on those lines”. Once the proposal is firmed up, it would be placed before the Cabinet for approval.

The government, from time to time, compensates IOC, BPCL and HPCL for these losses. The three were previously paid Rs 22,000 crore compensation for the 2021-22 and 2022-23 fiscal years. This was against Rs 28,249 crore of under-recovery.

The official added that once the funds are released to the oil marketing companies, it will be the prerogative of them on how they want to deploy the funds, including in capex.