The Hindu Business Line : Cleaning up the oil slick

The Report of the High Powered Committee on Financial Position of Oil Companies, headed by Mr B. K. Chaturvedi, Member, Planning Commission, is notable for its in-depth analysis, reform-oriented approach and recommendations that are practical and workable. If they are taken seriously and implemented by the government, the mess in the oil sector can be cleaned up within the next couple of years. More importantly, the clean-up will have been done with the least pain felt by consumers and without imposing added burden on the fiscal situation. The Committee which went into the pricing methodology for petrol, diesel, kerosene and cooking gas has rightly concluded that the concept of “under-recovery” based on the principle of “import substitution” as flawed. Simply put, the Committee does not agree with ‘import’ or ‘trade-parity’ based pricing since they add notional elements of costs not incurred by the oil marketing companies, leading to a bloating of under-recoveries and suggests export-parity pricing instead. Adoption of the latter will lead to higher retail prices for the four products which the Committee suggests can be passed on to the market over a staggered time-frame so that consumers will feel minimal impact. Thus, petrol prices would fully reflect the market by March 2009 while diesel, where the quantum of increase has to be substantially higher, will be fully stripped of subsidy in the next 24 months.

The Committee’s recommendation on targeting the delivery of subsidy on kerosene and LPG to below poverty line (BPL) families is practical though not new. The Smart Card system and transferring subsidy by cash through the banking/postal system to deserving families have been suggested in the past but they acquire a new importance in the present context of spiralling subsidies and are worthy of implementation. The suggestion to restrict the number of subsidised cooking gas refills to non-BPL households to six a year immediately and eventually bring to it down to zero in the next three years is another interesting and practical way of eliminating subsidy without overly hurting consumers.

Finally, the Committee has argued for the imposition of a Special Crude Oil Tax on upstream oil companies — ONGC and Oil India — and on other pre-NELP (New Exploration Licensing Policy) producers. Such a tax will directly fund the subsidy bill and the terms framed by the Committee appear favourable to the upstream companies. Importantly, the tax will be eligible for set off against the income tax, royalty and other tax liabilities of the company and will be in force only as long as subsidies remain. The road map is laid out. What’s needed though is will on the government’s part to implement these reform-oriented recommendations.

Related Stories:
Chaturvedi panel favours differential pricing for diesel
Fuel pricing — Time for quick, hard decisions