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Friday, Jul 09, 2004

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Oil and gas — Slickly left alone

Raghuvir Srinivasan

THE Budget was a major disappointment for the oil and gas sector, for which the government was expected to announce several important policies.

The Finance Minister has chosen not to address several issues, the most critical among them being that of subsidy on cooking gas and kerosene. In fact, he has reduced the subsidy on kerosene to Rs 3,500 crore from Rs 6,300 crore in the previous Budget. But he has not specified as to how the deficit of more than Rs 9,000 crore will be adjusted.

Last year, the deficit was shared by the oil companies, Indian Oil, Bharat Petroleum, Hindustan Petroleum, ONGC and Gail. The last two were specially asked to share a third of the subsidy burden which scheme expired this March 31. Therefore, the expectation was that the government would come out with a comprehensive plan of subsidy-sharing that would clearly lay down the liabilities of each of the oil companies.

Unfortunately, it has failed to do that, leaving the oil companies confused. One quarter of this fiscal has already gone by, which means that the oil companies will have to take the entire year's burden in the remaining three quarters.

The very fact that the oil companies are being asked to share the subsidy burden is retrograde. These are listed companies with substantial public shareholding and it is wrong for the government, as the dominant shareholder, to get the others to share its bill.

Ideally, the government ought to have clearly specified a timetable to phase out subsidies on cooking gas and kerosene or at least, devised a mechanism whereby the burden on the oil companies would have been lower.

Yet another widely expected move on calibration of customs duty on crude oil and petroleum products has not come through.

The government was expected to reduce customs duty on petrol and diesel as a measure of protection to consumers in a regime of rising oil prices. Such a move would have affected stand-alone refiners such as Reliance Industries, Chennai Petroleum and Kochi Refineries by reducing their protection levels, which is probably why it has not come through.

There was also talk of the government devising a price band within which the oil companies will be free to adjust retail fuel prices. That, again, has not come through.

Even as there are no favourable proposals, there are a couple of unfavourable ones that are expected to dent margins of the oil companies. These are the increase in tax burden with the additional 2 per cent education cess and the increase in service tax from 8 per cent to 10 per cent. In sum, it is a disappointing Budget for companies in the oil and gas sector.

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