India to pay state fuel retailers $5.5 billion oil subsidy

A vendor loads empty Liquefied Petroleum Gas (LPG) cylinders onto a truck in Mathura January 29, 2009.

NEW DELHI (Reuters) - India will pay 300 billion rupees ($5.5 billion) to state-owned fuel retailers forced to sell at cheaper government-set rates in the first half of the year, said three sources who saw the finance ministry's confirmation letter.

The government fixes retail prices of liquefied petroleum gas, kerosene and diesel to protect the poor, leading to revenue losses at state-run Indian Oil Corp (IOC) (IOC.NS), Bharat Petroleum Corp (BPCL) (BPCL.NS) and Hindustan Petroleum Corp (HPCL) (HPCL.NS).

The payout by the finance ministry, nearly 46 percent less than the 554 billion rupees the oil ministry had been seeking, will be released after parliamentary approval is granted, the sources said.

The finance ministry pays cash subsidies to state oil retailers while state-run upstream companies - Oil and Natural Gas Corp (ONGC.NS), Oil India Ltd (OILI.NS) and GAIL (India) (GAIL.NS) - sell crude oil and associated products at a discount.

India raised the price of diesel in mid-September, after a gap of more than a year, and capped annual sales of subsidised cooking gas cylinders to six per household.

The three fuel retailers received the letter from the finance ministry on Thursday morning, the sources said.

IOC, the largest fuel retailer, will receive a government subsidy of about 161 billion rupees, while HPCL and BPCL's share will be about 66.7 billion rupees and 72 billion rupees respectively, they said. (Reporting by Nidhi Verma; Editing by David Goodman)