Oil companies to get cash instead of oil bonds

In what could mark the beginning of a significant policy shift in the current subsidy regime, the central government may give oil marketing companies(OMCs) cash instead of oil bonds to compensate for the revenue loss on below cost sale of petroleum products.

Finance secretary Ashok Chawla told reporters in New Delhi yesterday, that the government would ideally want to provide (for revenue loss) in the forthcoming Budget and withdraw the current mechanism of oil bonds as either way it indirectly or directly was a part of the fiscal.

Last year the government issued oil bonds worth Rs71,292 crore to the oil marketing companies - Indian Oil, Bharat Petroleum and Hindustan Petroleum, but has not issued bonds this year.

Consequently BPCL and HPCL have slipped into losses, while IOC has barely managed to post a profit.

The oil bonds mechanism was devised in 2005-06 to keep increasing oil subsidies off budget as bonds are basically in the nature of deferred payment. For instance Rs71,292 crore worth of oil bonds were issued last year for revenue loss incurred in the period which would have inflated the fiscal deficit which stood at Rs3,26,515 crore during 2008-09 by that amount.

While denying any official communication to the companies, Indian Oil (director), finance, S V Narasimhan said that normally cash was a better proposition than bonds, cash being instant liquidity. He added that companies were pursuing with the ministry of finance and the petroleum ministry to take a decision before we close our accounts in January he said.