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Govt plans Rs 20000 crore aid to oil firms hit by soaring costs: Report

India plans to pay about Rs 20,000 crore ($2.5 billion) to the state-run fuel retailers, such as Indian Oil Corp., to partly compensate them for losses and keep a check on cooking gas prices, according to people familiar with the matter.

The oil ministry has sought compensation of Rs 28,000 crore. Still, the finance ministry is agreeing to only about a Rs 20,000-crore cash payout, the people said, asking not to be identified as the discussions are private. The people said that the talks are at an advanced stage, but a final decision is yet to be taken.

The three biggest state-run retailers, which supply more than 90% of India’s petroleum fuels, have suffered the worst quarterly losses in years by absorbing record international crude prices. While the handout could ease their pain, it would add pressure to the government’s coffers, which are already strained by fuel tax cuts and a higher fertilizer subsidy to tackle mounting inflationary pressures.

The government had earmarked oil subsidy at Rs 5,800 crore for the fiscal year ending March, while fertilizer subsidy was pegged at Rs 1.05 trillion.

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These refining-cum-fuel retailing companies, which use more than 85% of imported oil, benchmarked the fuels they produce to international prices. Those shot up after a global recovery in demand coincided with reduced fuel-making capacity in the US and fewer exports from Russia.

State oil companies must buy crude at international prices and sell locally in a price-sensitive market. At the same time, private players such as Reliance Industries Ltd. have the flexibility to tap into more robust fuel export markets.

India imports about half of its liquefied petroleum gas, generally used as cooking fuel. The Saudi contract price, the import benchmark for LPG in India, has increased 303% in the past two years, while the retail price in Delhi was increased by 28%, India’s Oil Minister Hardeep Singh Puri said on Sept. 9.

Representatives for India’s finance ministry and oil ministry declined to comment.

Bharat Petroleum Corp. and Hindustan Petroleum Corp. have also been holding down gasoline and diesel pump prices since early April to curb accelerating inflation.

The oil companies will require some intervention through price increases or government compensation to cover sustained losses, Bharat Petroleum Chairman Arun Kumar Singh said last month.