The Hindu Business Line : It's time to address OMCs' plight

The reported plea by the oil marketing companies (OMCs) to the Finance Ministry to let them borrow short-term working capital from the Oil Industry Development Board (OIDB) is not surprising in the light of the financial haemorrhage they suffer owing to their continued compulsion to subsidise domestic LPG and kerosene.

Ever since the OIDB was established to collect cess from oil producing companies through an Act of Parliament, most of the proceeds had been utilised for general budgetary purposes leaving only a small portion for development purposes of the oil sector.

In the past, reports by the House Panel had also drawn attention to this approach of the Government but nothing substantial to benefit the oil companies, both upstream and downstream, had been done. In fact, the Government also began collecting fuel cess for road development and other rural connectivity purposes.

Now that the oil companies suffering from under-recoveries are scouting for funds to part-finance their working capital, it is rather sad that the Union Budget 2006-07 did not address this issue In fact, the Rangarajan Committee, which submitted its report to the Government on February 17, specifically, suggested a slew of steps concerning pricing of domestic LPG and public distribution system (PDS) kerosene.

Panel proposals

Among the committee's recommendations, the significant ones include (i) restrict subsidised kerosene to below poverty line (BPL) families only; (ii) raise the price of domestic LPG by Rs 75 per cylinder (iii) discontinuance of the practice of asking upstream companies to provide upstream assistance, but instead collect their contribution by raising the OIDB cess from the extant level of Rs 1,800 a tonne to Rs 4,800 a tonne and the Government to foot the balance cost of subsidy from the budget.

In the Budget, the Finance Minister, Mr P. Chidambaram, said working groups/committee had gone into the question of fertiliser and petroleum subsidies, the latest being Dr C. Rangarajan Committee. He just urged the Members to help the Government evolve a consensus on the issue of subsidies.

Increase in Cess

However, one good thing he did was to let an increase in the cess under the Oil Industries Development Act from the extant Rs 1,800 to Rs 2,500 a tonne, even as the Rangarajan Committee pitched for Rs 4,800 a tonne. Even for this modest increase, Mr Chidambaram had to mention that the oil producing companies would absorb this increase, leaving little impact on the retail prices of petroleum products!

It is no secret that the OMCs Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation and IBP Ltd have reported a decline in their combined profits from Rs 10,818 crore in 2003-04 to Rs 7,193 crore last fiscal and in the current fiscal, they have incurred losses of Rs 2,898 crore in the first nine months.

In fact, in response to a question in the Lok Sabha, the Minister of State for Petroleum and Natural Gas, Mr Dinsha Patel, said his Ministry had asked for the views of the State governments on the suggestion of restricting the supplies of subsidised domestic LPG only to the BPL families.

The matter was subsequently discussed at a meeting held in December 2005 with representatives of the State governments.

The view that emerged was that subsidised domestic LPG is used to a considerable extent by above poverty line families too and thus restricting it to only BPL families might not serve any purpose! This explanation to absolve action on the part of the authorities is but deplorable, given the fact that the OMCs are bleeding black and blue by under-recoveries.

If the Government could not gear up its machinery to target subsidies to deserving sections but simultaneously not provide any scope to get rid of the rising under-recoveries of subsidies the OMCs are compelled to bear, the oil industry would definitely not carry on with its multiple chores.

It is sad that the proposal to set up a Petroleum and Natural Gas Regulatory Board has been hanging fire even after the dismantling of the administered pricing mechanism and the entry of private players in parallel marketing.

Energy experts contend that in the name of cosseting consumers, the interests of the oil industry or the proceeds of its cess should not be compromised for narrow ends of the exchequer.