The finance ministry has decided to phase out subsidies on liquefied petroleum gas for domestic use and kerosene sold through the public distribution system in three years.

The subsidy, which has been reduced this financial year to two-thirds of what was allowed during 2002-03-- the first year after the dismantling of administered pricing mechanism in the oil sector -- will be brought down to one-third of the 2002-03 level in 2004-05, and eliminated from April 1, 2006.

This means the subsidy on domestic LPG and PDS kerosene, which was Rs 67.75 a cylinder and Rs 2.45 a litre, respectively, in 2002-03 and has come down to Rs 45.17 a cylinder and Rs 1.63 a litre in 2003-04, will be reduced to Rs 22.58 a cylinder and 81 paise a litre in 2004-05.

Though the petroleum ministry is insisting on the subsidy phase-out in five years, the finance ministry is not willing to give in on this count.

Petroleum Minister Ram Naik is expected to take up the issue with Finance Minister Jaswant Singh after his return from abroad.

The petroleum ministry feels if the subsidy is phased out in five years, the burden of under-recovery on oil companies will be much less than Rs 5,430 crore (Rs 54.30 billion) carried by them during 2002-03.

The finance ministry says the petroleum ministry should implement the Cabinet decision, according to which oil firms should be allowed to revise the retail prices of domestic LPG and PDS kerosene as per their international prices.

Alternatively, the cash-rich oil firms, whose profits are growing despite the under-recoveries on account of domestic LPG and PDS kerosene, should continue taking this financial-hit.

The petroleum ministry says if the oil companies are allowed to charge import-parity prices, the prices of domestic LPG would jump by Rs 166 a cylinder and those of PDS kerosene by Rs 6 a litre.

The consumer, according to the petroleum ministry, could not be subjected to such a hefty price-hike in one go.