The Hindu Business Line : Waiting for a pragmatic policy

With global crude prices on the boil, policy response from the Government brooks no delay as already the oil marketing companies have been badly hit, unable to pass on their higher costs to the consumers. The Government would do well to quickly heed the Rangarajan Committee recommendations. According to the Rangarajan panel, if the OMCs are not to pass on the burden of rising crude prices, the Government should bear the subsidy burden via the budget.

MORE BUCKS for fuel seems inevitable. — A. Roy Chowdhury

The Centre has not been able to come out with a comprehensive fuel pricing policy based on the recommendations of the C. Rangarajan Committee so far even as the oil marketing companies (OMCs) are facing the prospect of heavy losses. The prolonged dithering on the policy front will also have serious long-term consequences for the economy.

According to latest reports, under-recoveries of oil companies will touch a record Rs 57,000 crore during 2006-07 on top of Rs 39,600 crore in 2005-06 if domestic product prices are not revised and global crude prices continue to hover around $74 a barrel. This alarm has been sounded by the Petroleum Ministry's own technical wing — the Petroleum Planning and Analysis Cell (PPAC) — in its report on the impact of global crude oil prices on domestic petro-product prices and state-owned oil companies.

The alarm sounded by the PPAC has to be seen in the context of the steady rise in under-recoveries by OMCs from year to year. They have grown sharply from Rs 9,370 crore in 2003-04 to Rs 19,910 crore and further to Rs 39,600 crore because of the relentless rise in international crude prices and the reluctance of the government to pass on the burden to the final consumers. The average annual price of imported crude oil increased from $25 a barrel in 2002 to $29 in 2003 and $37 in 2004. It zoomed to $50 in 2005 and over $65 in recent months.

HIGHER PASS-THROUGH

The Reserve Bank of India has expressed grave concern from time to time over the meagre pass-through of the burden of rising international crude prices to the domestic consumers of petroleum products. For instance, in its Annual Policy Statement for the year 2006-07 it says: "The Indian economy needs to prepare for higher orders of pass-through into consumer prices, in respect of the overhang as well as the possibility of additional increases in crude prices in the future."

Because of under-recoveries, the OMCs have been borrowing heavily to meet their financial requirements. According reports, IOC's borrowings alone exceed Rs 25,000 crore. The extra borrowings means diverting the funds from investment purposes to finance the consumption subsidies. Last fiscal, the Government had to issue oil bonds worth Rs 11,500 crore to partially compensate oil companies for the losses suffered by them on two cooking fuels. Also, upstream oil companies had to contribute Rs 14,000 crore to meet the burgeoning subsidy burden. Such financing is likely to be on a still bigger scale during the current fiscal.

HURTING FOR GOVT TOO

The under-recoveries not only hurt the bottomline of the oil companies, but the government is also losing a big chunk of its revenues in terms of tax on profits of OMCs and excise duties. And to make up for these losses, there is increased resort to government borrowings. This is clearly bad economics, more so because the subsidies on petroleum products are largely cornered by the richer sections. The elite must be made to pay the full long-term cost of the fuel they are burning.

As Mr T. N. R. Rao, former Petroleum Secretary, has stated, price signals in the economy should trigger proper inter-fuel substitution, curb wasteful use and stimulate measures for energy efficiency. If fuel prices are artificially kept low, there will be no incentive to improve conservation measures and energy efficiency. As it is, India is one of the most inefficient users of energy. According to the International Energy Agency (IEA), the energy intensity of the Indian economy is nearly three times that of developed countries.

Unless serious efforts are made to promote energy efficiency and oil conservation programmes, the problem will only aggravate in the coming years. This is because India's self-sufficiency in oil is only 30 per cent and is expected to come down further to just 15 per cent over the next decade or so unless the country succeeds in exploring new reserves and/or developing alternative sources of energy.

THE PRESCRIPTION

Against this backdrop, the Government should seriously consider the recommendations of the Rangarajan Committee without wasting time and decide on the pricing strategy at the earliest. The recommendations of the committee appear pragmatic. It has recommended a hike of Rs 75 per cylinder of the domestic cooking gas, Rs 1.21 per litre increase in petrol price, and Rs 1.91 per litre in the price of diesel.

The Committee has also recommended a cut in the Customs duty on petrol and diesel from the existing 10 per cent to 7.5 per cent, thus halving the effective duty protection to domestic oil refineries to 20 per cent. Incidentally, experts have pointed out that the refining margins in India are quite high compared to anywhere else in the world. Hence there is a need to bring down the refining margins in the country by reducing import duties.

With regard to the pricing of domestic LPG and PDS kerosene, the Committee has proposed restricting subsidised kerosene to only below the poverty line (BPL) families and suggested the hiking of kerosene price by Rs 10 a litre in the medium term and extending a dole of Rs 9 per litre directly to poor families through coupons and vouchers. Restricting the subsidy on kerosene to BPL households will pare the subsidy burden by Rs 6,315 crore, while hiking LPG prices by Rs 75 a cylinder will reduce the subsidy bill by a further Rs 4,414 crore.

To fund the balance subsidy bill, the committee has proposed increasing the existing cess of Rs 1,800 per tonne on ONGC and OIL to Rs 4,800 a tonne. The mop up from the oil cess will then increase to Rs 12,975 crore from Rs 5,000 crore now.

SPECIFIC DUTY

The petroleum sector contributes a whopping 40 per cent to the net excise mop up. Hence, the Committee is of the view that there is a need for the government to sacrifice its `windfall gains' in revenues (55 per cent of the retail price of petrol and 34 per cent of diesel price comprises duties and taxes). To reduce this huge tax burden, the Committee has recommended restructuring excise duties from the current mix of specific and ad valorem duties to a pure specific levy.

Evidently, the prices of petroleum products have been kept on hold by the Government because of political compulsions. In this context, the Rangarajan panel has rightly suggested that politics be kept out of oil pricing.

In its view the Government must stop meddling with petroleum product prices and instead leave it to oil marketing companies to pass on the burden of rising crude prices to consumers. Should the Government decide otherwise, the subsidy burden should be borne by the Government through the budgetary provision.

In fact, at a meeting with the Prime Minister, the Finance Minister, and the Prime Minister's Economic Advisory Council Chairman, Mr Rangarajan, the new Petroleum Minister, Mr. Murli Deora demanded budgetary subsidies for petroleum products on the lines of food and fertiliser subsidies.

But this would hardly be a solution to the problem at a time when the Government is trying to bring down all subsidies, including those on food and fertilisers in order to prune the revenue and fiscal deficits.