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The central government is expected to extend a substantial compensation package of Rs 30,000 to Rs 35,000 crore to state-owned oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) — to offset losses incurred due to the sale of domestic LPG below cost over the last 15 months. 

A senior official confirmed the development, stating that the finance ministry is currently assessing the exact amount of under-recovery and the mechanism through which the relief will be disbursed, according to a PTI report.

Although the Union Budget for FY26 (April 2025 to March 2026) made no direct provision for this subsidy, the government appears to have found fiscal room through increased fuel levies. In April, excise duties on petrol and diesel were raised to generate an additional Rs 32,000 crore in revenue. This sum is now being considered for allocation to compensate for the LPG-related losses.

"Oil marketing companies (OMCs) are part of the Government family. Compensation will happen. We are evaluating how much is under recovery and looking at the modalities for compensating them," the official said, claims the report.

Under-Recoveries Stem From Controlled Prices

Domestic LPG prices are regulated to shield consumers from the volatility of global markets. These controlled prices are significantly lower than international benchmarks like the Saudi Contract Price (CP), which is used to price LPG. Since India imports a considerable portion of its LPG due to limited domestic production, the gap between international costs and regulated retail prices has led to losses for the OMCs.

For the current fiscal year (2024–25), under-recoveries are estimated at around Rs 40,500 crore. To partially ease this burden, the government recently hiked LPG prices by Rs 50 per 14.2-kg cylinder, helping reduce the gap between cost and selling price.

Mechanism Under Review

The finance ministry is now working on finalizing the route and structure for the compensation, with the official suggesting that funds would likely be channeled through the Consolidated Fund of India. "Yes, broadly on those lines," he said, when asked about the proposed routing.

Once the mechanism is finalized, the proposal will be presented to the Cabinet for approval. The idea of offering Rs 35,000 crore in LPG subsidies over two years had been considered earlier, and this latest move appears aligned with that thinking.

This is not the first time that the government has extended support to the OMCs. In the past, Rs 22,000 crore was disbursed for under-recoveries from FY22 and FY23, which had totaled Rs 28,249 crore. The official clarified that once compensation is released, it will be up to the companies to decide how the funds are used, including for capital expenditure.