Govt plans LPG loss compensation for OMCs via excise duty hike proceeds

The OMCs will be free to use the compensation as under-recovery reimbursement or for their infrastructure enhancement

The Finance Ministry is close to finalising compensation for state-run oil marketing companies (OMCs) to offset under-recoveries incurred on the sale of subsidised liquefied petroleum gas (LPG), two government sources, aware of the development, said.

The compensation package is expected to be funded through the proceeds of excise duty hikes and will be channelled via the Consolidated Fund of India, a senior government source said. Excise duty on petroleum products is typically used for general revenue purposes; in certain cases the government may redirect a portion of the collections to support OMCs. This ensures that the fiscal burden of shielding consumers from global price volatility is partly absorbed within the system without immediate pressure on the expenditure budget.

Key meeting of the Expenditure Finance Committee (EFC) to consider the OMCs’ dues have been held earlier in March and May. The union government raised excise duty by Rs 2 per litre for both petrol and diesel.

“It is now in the final stage. It is a matter of detail – how much exactly was the under-recovery and so on,” he said. “Oil companies are, after all, part of the same government family. So, it is not that we want them to suffer by themselves. Compensation will happen soon.”

While the government is yet to formally announce the quantum of compensation, he confirmed that it will be funded via the excise duty collections to support OMCs that absorb fuel price shocks for the consumer.

OMCs reportedly incurred a cumulative LPG under-recovery of about Rs 30,000 crore in April-December 2024, driven by elevated international fuel prices. Given the financial strain, the oil ministry had approached the Finance Ministry ahead of budget 2025, seeking compensation to mitigate these losses.

The government has in the past compensated OMCs for losses arising from keeping LPG prices stable despite global volatility. In October 2022, it approved Rs 22,000 crore as one-time compensation for under-recoveries incurred in FY22.

The OMCs will be free to use the compensation as under-recovery reimbursement or for their infrastructure enhancement, he said.

The Ministry of Petroleum and Natural Gas, along with the Ministry of Finance, has been assessing the losses by OMCs including,  Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) to arrive at a final compensation amount.

Another official said that the process is ongoing and being carefully reviewed. “We are trying to make a very good decision for the OMCs,” he said.

OMCs have in recent years faced significant pressure due to the volatility in global LPG prices, especially in the aftermath of the Russia-Ukraine conflict and spikes in international energy prices. Despite the surge in input costs, retail prices for domestic LPG cylinders were kept largely unchanged for extended periods, resulting in heavy under-recoveries.