May 30, 2005, New Delhi, Press Release

The Government collects about Rs.6000 crores as cess on domestically produced crude oil, and bears an equal amount in the form of petroleum subsidies. There is, hence, no net burden of petroleum subsidies on government, said Pradeep Mehta, Secretary General, CUTS while participating in a discussion on Petroleum Subsidies organised by the Ministry of Finance.

The meeting was organised by the Ministry of Finance to hold consultations with various stakeholders, including consumer organisations to provide inputs for preparing a roadmap for a new focused subsidy regime.

“The cess was introduced in mid-70s to provide financial assistance to state-owned companies. Over the past three decades, the government has collected about Rs.50,000 crores as cess, and almost all of it has gone to the coffers of the Finance Ministry. The cess amount now seems to be an implicit arrangement of meeting the petroleum subsidy burden,” observed Mehta.

Oil is one sector where there is a lot of government intervention. Though the administered price mechanism was abolished in March 2002, the government continues to play a major role in determining prices of major petroleum products. There is absolutely no transparency in the pricing of various petroleum products, added Mehta.

Even the method of calculating subsides on LPG and Kerosene is distorted, as it is based on import parity pricing of petroleum products and not on the basis of unrecovered costs, which is the appropriate figure for calculating subsidy. Furthermore, this pricing system allows oil companies to factor in customs duty to arrive at the import parity prices. Since the country does not import petrol or diesel, the amount collected as notional customs duty, estimated at Rs.10,000 crores goes to bolster the financials of oils companies.

“The claim of huge subsidy burden on petroleum products and bleeding oil companies are exaggerated, and most of the burden is passed on to the consumers” said Mehta.