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Raghuvir Srinivasan

It is time the Government initiated bold action in the oil sector, as it has done in the telecom sector.

RUPEES 3,100 CRORE. That is the amount of investor wealth destroyed in eight oil company stocks in Friday's trading. The stocks? Indian Oil, Bharat Petroleum, Hindustan Petroleum, ONGC, IBP, Kochi Refineries, Chennai Petroleum and Bongaigaon Refinery. The reason? The statement by the Petroleum Minister, Mr Mani Shankar Aiyar, that the Government will continue to control the pricing of petroleum products.

It was indeed a swift reaction from the market to the Minister's statement, which, if taken to its logical conclusion, is bound to affect the performance of the oil companies. Granted, the Minister only publicly acknowledged what is already happening in the industry; oil companies cannot adjust retail prices of products without government clearance. But what probably worries the market is that in these days of reforms and liberalisation the Government should be talking in terms of a return to the administered pricing mechanism, known for its inefficiencies. And, then, the Minister's statement came at a time when the general expectation from the Government was initiating reforms in the oil sector.

Indeed, the Prime Minister, Dr Manmohan Singh, said during his tour of the European Union that the Government would introduce the Petroleum Regulatory Board Bill in the winter session of Parliament. The Bill has been in the works for more than two years now and the Prime Minister's statement was perceived as an acknowledgement of the need for urgent reforms in the oil sector, which remains one of the laggards in the economic reforms report card. The disappointment with Mr Aiyar's statement now is thus all the more.

The Government should note a vital difference between the heyday of the administered price mechanism in the late 1990s and now. That is, the large following that oil sector stocks have acquired in the market now with ONGC in the exalted position of being the one with the largest market capitalisation on the BSE.

Bharat Petroleum, Indian Oil and Hindustan Petroleum are fancied as much by institutional — foreign and domestic — as individual investors. The Government is no longer the sole owner of these companies — in the case of Hindustan Petroleum, public shareholders own just under half — and it has to account for the impact of its actions on the other shareholders.

The refining and marketing companies reported considerably lower profits in the first half of this fiscal mainly because of the policies of the government. They suffered losses in marketing margins on petrol and diesel following the Government's reluctance to allow them to retail these products at market-linked prices.

This is in addition to the existing susbsidy burden they have to carry to enable the Government sell cooking gas and kerosene at price considerably lower than their market value.

Yes, oil companies are seeing a boom period now with global crude oil prices on a high. It would, however, be wrong to say that they can afford to take losses in their margins; when global prices fall, their margins will drop correspondingly. Will the Government come to their aid then?

A company such as ONGC is in dire need of fresh oil finds and is investing heavily in exploration. It is also seeking and buying out equity in oilfields abroad. The company needs all the cash resources it has — and they are ample — to fund its exploration plans.

By tapping ONGC's cash to fund its own subsidy, the Government is harming the long-term interests of the country, which is to add to the existing oil reserves. Ditto with the refining companies which are all investing in strengthening their market infrastructure to take on high profile competition.

Besides, the Government could be harming its own interests by financially draining the oil companies; it may not get a good price if and when it does decide to divest chunks of their equity. The signal that it is sending out to investors — within the country and without — is also not encouraging at all.

It is indeed puzzling to note the divergent approaches of the Government towards oil and telecom, another industry that touches the common man everyday.

The telecom industry, which was neck deep in more serious problems, is now throbbing with activity thanks to some bold decisions made by the Government. And it is now considerably cheaper to use a telephone than before even as service levels have vastly improved.

Perhaps, it is time for similar bold action from the Government in the oil industry too. Free, well-regulated competition can deliver better services at optimal cost to the consumer than government control and diktat.

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