Oil subsidies: Politics first, economics last

Successive Governments have found themselves trapped in a maze as far as petroleum pricing and subsidies are concerned as politics has taken over sensible economics.

In the first quarter of 2012-13, when the gross price of crude oil was $109.82 a barrel, the upstream companies had to give a discount of $56 a barrel, resulting in a net price realisation of $53.82 a barrel. The upstream companies are questioned in all investors meet regarding the uncertain subsidy sharing, which also impacts their profitability.

The Finance Ministry has doled out about Rs 1,50,500 crore since 2009-10 to 2011-12 as cash compensation. For 2012-13, it has already given compensation of Rs 28,500 crore and subsequently comfort letter for Rs 25,000 crore.

Since 2005-06 till 2009-10, the Government has issued oil bonds worth over Rs 1.42 lakh crore.

On the upstream contribution, GAIL has taken burden of almost Rs 15,933 crore from 2003-04 to 2012-13 third quarter. ONGC has paid subsidy of Rs 2,04,023 crore since 2004, and Oil India since 2003-04 has given subsidy of Rs 25,000 crore.

De-regulate but slowly

Although in 2002 a decision was taken to deregulate petroleum product and price in phases, and allow the prices to align with market prices, that didn’t actually happen.

Though baby steps are being taken since June 2010 towards this for petrol, an artificial control still continues.

Recently, dual pricing for diesel was introduced, where bulk consumers — Railways, Defence, State Transports, and Industries — are paying market price, while the retail consumers are seeing minor increases (about 50 paise).

This has resulted in hike in rail fares, a mode of transport mostly used by aam aadmi . It has also diverted bulk customers such as State transport corporations to buying fuel from retail outlets, as there is no way of stopping vehicles from filling tanks directly from petrol pumps. Therefore, chances of black marketing increases.

At present, the diesel subsidy is available to all in the retail outlets whether the consumer is driving an SUV or a two-wheeler.

In case of cooking fuel (domestic LPG and PDS kerosene), in 2002 it was decided that subsidy would be on specified flat rate for each depot/bottling plant and would be met through fiscal budget. Currently, this subsidy allowed on PDS kerosene is Rs 0.82 a litre and on domestic LPG is Rs 22.58 a cylinder. This scheme is till March 31, 2014.

PSU’s problems

Before one goes any further, it has to be remembered that all the PSUs — Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation — are listed entities, and so are upstream companies — ONGC, Oil India and GAIL. These entities are answerable to their shareholders.

The continued incurrence of under-recoveries by OMCs is adversely affecting their financial and liquidity position. And the OMCs are able to report profits only as a result of getting significant compensation of their under-recoveries from the Government and public sector oil companies.

The Government has been pursuing a burden sharing mechanism since 2003-04 to ensure that the burden of under-recoveries (the loss incurred by the OMCs for selling auto and cooking fuel at a controlled price) is shared by all stake holders — the Government, the public sector oil companies, and consumers.

The burden was shared in the said manner: Government through issue of oil bonds/cash subsidy; public sector upstream oil companies through price discounts to OMCs; OMCs to bear a portion of the under-recovery; and consumers to bear minimal price increase. However, in the last couple of years, the Finance Ministry has decided to give cash compensation instead of issuing oil bonds to OMCs. This was done to give a clearer picture of the state of the country’s economy.

The economists within the Government agree that the unwillingness to align energy prices with market rates poses a threat to country's economy.

Free market prices?

The Government clearly wants to reduce its subsidy burden on petroleum products. A step in this direction was in allowing oil companies to decide on petrol prices, small increases in diesel prices till the under-recoveries are neutralised and capping the number of subsidised LPG cylinder a consumer can get to nine. It has decided to adopt the direct transfer of subsidies on kerosene and LPG. This is to ensure that the subsidy goes to the beneficiary and also bring down the subsidy burden. Those tracking the sector say these efforts are being made to reduce the fiscal deficit.

The buzz is that Government may re-introduce import duty on crude oil. India imports over 80 per cent of its crude oil requirement, hence international prices play a decisive role in the domestic pricing.

The Government’s move is in the right direction, but it is too little, too late. Staggered increase of petroleum product prices, delay in getting cash compensations, and uncertainty on burden sharing keeps the situation fluid.

The prevailing situation has also stopped competition, which would have resulted in prices becoming more competitive.

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