Oil marketing and upstream companies need more than baby steps in price deregulation.

A lesser known aspect of the much talked about oil subsidies is the unprecedented ‘liquidity crunch’ that oil PSUs viz., IOC, HPCL and BPCL, face perennially. Subsidies are administered through these undertakings.

Under instructions from the Government, these PSUs sell kerosene, LPG and diesel at low prices (prior to June 2010, price of petrol was also regulated). How is the excess of cost over selling price covered?

Oil and gas PSUs contribute 40 per cent of differential amount by way of discount on crude supplies. The Government is supposed to reimburse 60 per cent as subsidy. However, it rarely meets its commitment in full!

RISING UNDER-RECOVERIES

Thus, during the first nine months of 2012-13 fiscal (April-December 2012), these PSUs had an under-recovery of around Rs 1,25,000 crore. Of this, while Rs 34,500 crore came from upstream companies, GOI gave Rs 30,000 crore as subsidy.

The remaining Rs 60,500 crore had to be absorbed by oil PSUs.

For the whole of 2012-13, total under-recovery is estimated to be Rs 1,67,000 crore. Against its obligation of around Rs 100,000 crore, the Government’s actual payment may remain at Rs 30,000 crore – courtesy fiscal compulsion!

Consequently, PSUs will have to absorb a whopping Rs 70,000 crore.

Due to shortfall in subsidy reimbursements and delayed payments ad infinitum, they are forced to borrow heavily, which keeps on increasing. Thus, dues of IOC went up from Rs 75,000 crore at end of 2011-12 to Rs 98,000 crore at present.

This in turn, has led to ever rising interest cost. For IOC, it increased from Rs 2670 crore in 2010-11 to Rs 5600 crore in 2011-12 and is expected to be more than Rs 8000 crore during 2012-13.

As a result, OMCs are facing continuous erosion in their bottom line. If the trend is not arrested, the situation may reach a point of no return. The possibility of their turning sick is not ruled out, much like SEBs!

OMCs are the lifeline of India’s economy. They meet almost the entire requirement of diesel, kerosene and LPG. Any disruption in their supplies – even for a brief period – can have catastrophic consequences.

By asking upstream companies viz., ONGC, OIL etc to take a knock of 40 per cent of under recoveries, the Government is also impairing their capacity to grow. They are unable to make the required investment to sustain even current production!

ONGC plans to invest over Rs 33,000 crore during the current fiscal in exploration and production of oil and gas. However, it is hamstrung, having taken a hit of Rs 30,000 crore till December 12 (OIL took a cut of Rs 4,478 crore.)

In the second quarter of 2012-13, its profit declined by 32 per cent to around Rs 6,000 crore. At the start of the year, it had a cash reserve of Rs 12,000 crore. This would drop to Rs 4500 crore by year end.

Despite deceleration in other imports, in the second quarter of 2012-13, we had a whopping current account deficit of 5.4 per cent of GDP; thanks to continuing high oil imports.

EXPLORATION HIT

To deal with the twin deficits, current account and fiscal, there is a dire need to reduce dependence on oil imports, currently at 80 per cent. Therefore, oil and gas companies have to be financially sound so that they can invest in domestic exploration and production, and acquisition of such assets in other countries.

This is next to impossible under the existing dispensation which has had a debilitating effect on their balance sheets, rather than enabling them to generate the required surpluses.

The Government admits that oil subsidies should go. It is working on the recommendations of Vijay Kelkar to remove subsidy on diesel to the extent of 50 per cent in the current year and the balance next year; on LPG 25 per cent in the current year and 75 per cent in the next 2 years and on kerosene 33 per cent by 2014-15. Will it implement this roadmap?

The Government has now announced that ‘OMCs have been given the flexibility to fix prices of diesel’. Petroleum Minister Veerappa Moily also hinted that ‘they may increase the prices in small amounts’. It has also increased the cap on subsidised cylinder from six to nine.

Following this, OMCs have hiked the price of diesel by 50 paise per litre. This is much short of the Kelkar package. Moreover, in the absence of a definite roadmap, it is doubtful whether even this small hike would be sustained.

Even so, the above decisions yield a net saving of only Rs 8000 crore during the current fiscal (around Rs 10,000 crore saving due to diesel price hike and Rs 2000 crore lost due to the higher cap on subsidised LPG cylinders). That hardly makes any dent on the losses of oil PSUs.

The present lackadaisical approach won’t work. It must get out of the political mind-set as those sensibilities cannot be addressed even with calibrated/small hike in prices. A big bang approach is the need of the hour.

The Government should de-regulate oil prices forthwith and stop subsidising these products. Poor persons may be given money directly in their bank account under cash transfer scheme.

Post-deregulation, private sector will be encouraged to invest in oil retailing. The Government should withdraw the ‘minimum’ investment stipulation to buttress a level playing field and thus help this process.

In a de-regulated regime, prices will be set competitively. Add-ons like marketing cost, margins and freight will be trimmed and the resultant cost would be substantially lower than what is allowed for computing under-recoveries under extant dispensation.

OMCs will have an opportunity to stand on their own. Their capacity to expand and grow will depend on their efforts to sustain in a competitive environment and not on how much they get from the Government and when. Their balance sheets will be healthy and buoyant.

Likewise, upstream companies – freed from obligation to support OMCs – can look forward to augmenting their surpluses for much needed investment in exploration and production, besides acquiring oil and gas assets abroad.

The adverse fallout if any, of withdrawing subsidies would be minimal. There are umpteen studies to show that bulk of Rs 170,000 crore doles on diesel, LPG and kerosene ends up in the hands of those who really do not need them.

So, what are we waiting for?

The author is Executive Director, CropLife India. Views are personal

(This article was published on January 18, 2013)
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