In a communication to the Prime Minister's Office, the petroleum ministry has sought a Rs 52 per cylinder rise in the price of domestic liquefied petroleum gas and a Rs 1.10 per litre hike in the price of kerosene sold through the public distribution system even after waiving the 16 per cent excise duty on these two products.

This will mean a 21.55 per cent increase in domestic LPG prices and a 12.24 per cent rise in prices of PDS kerosene.

The ministry has argued that the price hikes are essential to make up for the under-recoveries suffered by oil companies during 2002-03, especially in view of the reduction in subsidies on the two petroleum products in 2003-04.

The petroleum ministry said while Finance Minister Jaswant Singh had announced that the subsidy on PDS kerosene and domestic LPG would be phased out in 3-5 years, the finance ministry had now decided to abolish it in three years and had reduced this year's subsidy by a third.

It called for phasing out of the subsidy in five years. This could reduce the burden on consumers by about Rs 11 per cylinder of LPG and Rs 40 paise per litre on PDS kerosene.

The petroleum ministry has pointed out that the excise duty of 16 per cent on both domestic LPG and PDS kerosene is too high and needs to be abolished.

This could reduce the burden on the consumers by Rs 29 per cylinder of domestic LPG and Rs 1.10 per litre of PDS kerosene.

The ministry has said even if the subsidy is phased out in five years and the excise duty on the two products is waived, their retail prices in Delhi should be increased by about Rs 52 per cylinder for domestic LPG and Rs 1.10 per litre for PDS kerosene on the basis of their average international prices during 2002-03.

However, the finance ministry is of the view that the oil companies have been making windfall profits after the dismantling of the administered pricing mechanism in the petroleum sector from April 1, 2002, and are in a position to absorb the under-recoveries.

The net profits of oil companies jumped to Rs 23,254.6 crore (Rs 232.55 billion) in 2002-03 from Rs 12,708.9 crore (Rs 127.09 billion) in 2001-02.

If the government accepts the petroleum ministry's proposals, the bottomlines of the oil companies will improve by around Rs 5,430 crore (Rs 54.30 billion).

The petroleum ministry's communication to the PMO recounts that as per a Cabinet decision, subsidies on domestic LPG and PDS kerosene post-APM are to be set on a flat rate and the retail prices of these products should vary in line with the international oil prices.

In 2002-03, the flat rates of subsidy on these products were frozen at April 2002 prices and were Rs 67.75 per cylinder for domestic LPG and Rs 2.45 per litre for PDS kerosene.

The petroleum ministry says these prices have not been revised since March 2002 despite a considerable rise in the international prices of LPG and kerosene. This resulted in Rs 5,430 crore under-recoveries during 2002-03.