Cleaning the fuel subsidy mess

The Finance Minister's candid admission on subsidies affecting his sleep will only be cold comfort to public sector oil companies which have been battling the fuel pricing issue for some years now. “Today, things have become so bad that we are content scraping through each fiscal with negligible profits. At least, this will ensure that we can still access loans, unlike Air India, which has been written off by all bankers,” an oil sector official told me recently.

It is unfortunate that even gigantic entities like IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are in a difficult situation thanks to the pressure of mounting fuel subsidies and inadequate compensation for losses incurred. This has become a yearly ritual these days, and their top managements have virtually reconciled themselves to the fact that they just have to live with this harsh reality.

FUEL PRICES

Mr Pranab Mukherjee's predicament is understandable, given that the earlier projections of oil subsidies for this fiscal at Rs 24,000 crore have jumped more than five times since. Given a chance, he would ideally like to opt for complete price deregulation, except that it will be politically suicidal to do so at a time when his own Government is constantly walking the tightrope. The only alternative is to continue with these subsidies, except that the fiscal deficit balloon is in danger of bursting any moment.

It seems almost ironic that, less than two years ago, the Government had announced with much fanfare the freeing of petrol prices. The oil companies were jubilant, especially when there were strong indications that diesel would follow suit. The party pooper came in the form of global crude prices which almost shot up overnight to more than $80 per barrel, and have stayed at more than $100 since. Petrol prices were constantly hiked, keeping in line with the deregulation mantra but, after a point, the companies had to cave in to political pressure and desist from further increases. The net result is that petrol losses have been mounting since November last year and, with no sign of a price increase in sight, will have to be written off for this fiscal.

If the present global price patterns continue, the trio of IOC, BPCL and HPCL reckon that they will end up losing Rs 6,000 crore this year on petrol losses alone. And what is galling is that they won't be reimbursed a dime, simply because it is no longer a subsidised fuel. Almost laughable, isn't it? A commodity whose pricing has been left to the oil companies which, in turn, have their hands tied, because their largest shareholder, the Indian Government, won't entertain any such move. But still, they will have to bear the losses, because it was knocked off the subsidy fuel list in mid-2010.

LION'S SHARE

So, what happens to the minority shareholders of these oil companies who could justifiably protest that they have been short-changed in the process? There is little they can do except grill the top management at the annual general meetings. It is, of course, another issue that a lion's share of these shareholders own cars, and would baulk at the idea of a petrol price hike. “Look, each of us knows what the ground reality is when it comes to pricing. The Government is the ultimate deciding authority and will hold the view that hiking fuel prices at this point isn't in the public's interest. How can you possibly argue with that logic?” a top oil sector executive asked me.

What then is the way out of this mess? There is no question that the present subsidy system has ruined the finances of the refiners whose borrowings are now closer to Rs 150,000 crore. And it hasn't helped the upstream sector either, which bears a part of this burden by way of offering discounts on crude and petro-products sold to IOC, HPCL and BPCL. On Wednesday, Oil and Natural Gas Corporation declared in its third-quarter results that its subsidy (support) outgo had increased three times, from the previous year, to more than Rs 12,000 crore. The company is clearly disconcerted by the fact that it will now need to go beyond its prescribed one-third compensation package to bail out the refiners.

ONGC's concern is understandable. Its investors aren't too kicked with the fact that it is the comfortable fall guy every time the issue of compensation crops up towards the end of each fiscal. Little wonder, therefore, that the prospects for its mega follow-on public offer (FPO) are diminishing by the day. As for IOC, HPCL and BPCL, they have earmarked more than Rs 200,000 crore during the next four years for investments in refineries, pipelines, terminals, bottling plants and retail outlets. Some of their existing infrastructure is so creaky that it needs to be replaced immediately. By the end of the day, petro-products will have to reach every nook and corner of the country. The public sector refiners are aware that they don't have the flexibility to shut shop like their private counterparts though, in all fairness, the latter isn't compensated for selling fuels at a discount to the market price.

BETTER ALTERNATIVE

The solution, therefore, is to at least allow the system of free petrol pricing to prevail. It is high time that people, who can afford to buy cars and two-wheelers, realise that fuel won't come in cheap. None of them complains when they have to pay for expensive airline or movie tickets. Is petrol such a measly commodity that it has to be sold cheap? There is just no alternative unless state governments decide to do away with sales tax on petrol, clearly an inconceivable option from the viewpoint of revenue generation. Dealing with diesel pricing won't be as straightforward, since it is used in the commercial vehicle segment which carries food products across the country. Higher operating costs will do little to curtail inflation, and diesel prices just cannot be tinkered with, at least for now.

Yet, it is only logical that users of cars and SUVs pay the market price for the fuel. The auto industry believes this is a better alternative to taxing diesel vehicles. Now, how does one ensure that diesel-driven cars are charged higher at retail outlets while vans and trucks pay less? Certainly not the easiest of tasks, especially in a system where cross-subsidies only spawn fuel adulteration. Clearly, finding a solution to this huge mess is almost impossible. There have been any number of expert committees which have come up with suggestions, but the reality at the ground level is something quite different. Till then, sleepless nights are only inevitable for the Government and the entire oil sector.

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