The govt is milking the petroleum sector for revenues: Aiyar

“It may be an unpredictable market, but so long as crude oil prices rise, the North Block mandarins would only be grinning more,” says Congres leader Mani Shankar Aiyar, pointing to escalating revenues from Central excise and customs duties on petroleum and petroleum products.

From May 2004 through January 2006, Aiyar headed the oil ministry and dealt in his own way with the spike in global crude oil prices through what he called an “equitable burden sharing” mechanism.

“We (UPA) kept the petroleum products economy geared towards the best interests of the consumer. But this was simply jettisoned after 2013 because of the belief that crude prices were beginning to fall – the Indian basket of crude fell to $46 a barrel in 2015-16 and $48 in 2016-17, but it went up $56, and by October 2018 had reached $79 a barrel and threatens to go up further,” he points out.

In conversation with BusinessLine , he voices his concerns on such skewed policies, the sorry state of discovering and recovering our own domestic resources, and the lack of governmental commitment to the sector.

“You don’t have gas, you don’t have crude, and you import exactly the same proportion today at a higher absolute quantity as you did 15-20 years ago. Indeed, the proportion of imports in consumption is going up, crossing 80 per cent and heading to 85 per cent. You use the petroleum sector as a milch cow and not as a cow to be nurtured,” he said. Excerpts

I think the economy has not matured enough for that. In December 1997, the IK Gujral government decided to shift oil pricing from government-administered prices to market-determined prices. But the price of one barrel of oil in the international market at that time was $10, the average for that year (1997) was $12 a barrel. When prices are so low then, of course, it made sense to opt for market pricing. But what happens when prices rise?

Although Ram Naik, as the Minister of Petroleum & Natural Gas in Vajpayee’s Cabinet (1999-2004), carried forward for four years the legacy of the Gujral regime, by 2003 crude oil prices crossed $20 a barrel and headed towards $25. Sensing that it may go even higher the government then started edging back towards administered prices because there is a limit to which the consumer can take an additional burden.

They backtracked from what was until then, and what was until very recently under the Modi regime, an ideological nostrum that the Market is the Master. When in 2007 international oil prices ruled at approximately the same level as they are ruling today, our retail price for petrol was under ₹45 a litre but is now touching ₹90, while diesel was sold at ₹30-31 in 2007 but is now retailing at close to ₹80! This is all right for economists living in ivory towers but I don’t think it’s practical for Petroleum Ministers and governments who, in a democracy, have to face the people every five years.

When I took over as a “temporary” minister with “additional” charge of petroleum, crude oil prices had risen for the first time ever above the $30 a barrel mark. On the day I took over, it was approximately three times higher than when the Gujral government decided to tether our fate to the market.

Indeed at my first press conference 24 hours after I took over, I invited the Saudi Arabia ambassador to join me. And he solemnly informed the media that the optimum price should be $27 a barrel! You know now what happened subsequently. So, in that unprecedented situation, obviously intervention in the market would have to be even deeper and wider than in the end period of Ram Naik’s tenure.

In fact, I even wondered whether I had been set up as a scapegoat to handle this crisis so that I would become the object of public ire and give a convenient excuse to the authorities to say, “Well, we are going to produce another Petroleum Minister”. I might sound paranoid, but that is the thought that did come to my mind…

I had to find a way out. We came up with an “equitable burden sharing” mechanism. We identified approximately six key stakeholders: the central government which earns an enormous amount through excise duty (it was ad valorem then); State governments that tax almost all petroleum products ad valorem; the upstream oil companies who are allowed to market their products at international prices irrespective of the level of international prices; the downstream or oil refining companies, who are also retailers; and, finally, the consumers — who can take the burden only up to a point.

At a very simplified level, petrol is consumed by the rich; diesel is consumed by those in the transport business; kerosene is consumed by the poorest of the poor; and LPG is consumed particularly by the lower and upper middle class. Now, in these circumstances, we had to have an element of administered pricing in order to cater equitably to all the stakeholders, on the one hand, and all these income groups, on the other.

Though the transport sector is the major consumer of diesel, higher transport costs are inevitably passed on to the consumer. Diesel prices impact almost everybody and, obviously, unequally in an unequal society.

An economic model for the Petroleum Ministry that says that prices will be dictated by the market, and that is the price we will go with, ignores the social and economic realities that constitute the bread and butter of the politician in an elected democracy. So, the advocates of market pricing for petroleum products do not seem to be in grips with reality.

Therefore, looking at this concept of equitable burden sharing, what it meant was that in a world of rising crude prices we look at the Central government first and ask it to reduce its excise revenue by a certain amount. In May/June 2004, this was agreed to with the proviso that customs duty would be imposed on crude oil. We also asked state governments to lower their taxes, but few heeded to our call.

As far as upstream oil companies were concerned, every time global prices increased, a completely unearned bonus goes to these companies because they are allowed to market their crude at the prevailing international price. So, we asked them to share some of the burden by giving further discounts to our refiners.

Then we came to the oil refining and marketing companies who were screaming murder over what they called “under-recoveries”. I, like most others, believed that “under-recovery” was a real loss; it took me a while to understand that this was purely notional, there was really no loss because it is only the difference between international and domestic prices.

Which is why ONGC and IOC are the geese laying the golden eggs for the Finance Ministry, for their massive dividends end up in North Block’s pocket. If the Petroleum Ministry did not exist, and taxes were not levied on petroleum products, there would be little revenue for the government. So, in the interests of equity, we reined in petrol and diesel prices below the market even though this increased the “under-recoveries” of refineries and marketers.

Having thus shared the burden among other stakeholders, we finally came to the consumer. The last remaining share of the burden was passed on to the consumer, which was certainly nowhere near what it would have been if the entire burden had been passed on.

However, in the five years of the Modi-Jaitley government, they have raked in nearly ₹12 lakh crore of excise duties on petroleum products — almost all of which has come from putting the entire burden of rising crude oil prices on the consumer.

When crude oil prices began falling, instead of lowering specific duties, Modi-Jaitley raised them so that they rule at 205 per cent higher for petrol and 431 per cent for diesel than when the UPA demitted office.

So, all the benefit that could have gone to the consumer was cornered by the Finance Ministry. At the same time, they also put up a special excise duty of ₹8 a litre on petrol and diesel — a kind of infrastructure cess — which actually became part of the nest egg that Finance Minister Arun Jaitley is sitting on. Therefore, the entire balance of our economy is now dependent on black- and blue-eyed Sheikhs and American shale oil and gas producers jacking up prices.

Every time a Sheikh pockets an extra cent, the glee in North Block increases because it pockets an extra rupee, whereas the sense of doom among the consumers only grows. As I said, there is a political price to be paid for such governmental avarice and that price is now beginning to stare at the Modi government in the face as elections come closer.

So, they’ve now done a U-turn and come back in the direction of the “equitable burden sharing” formula we evolved. But, it is too little too late.

Well, what the Congress Party said was that petroleum products must be in GST, but no GST rate should be higher than 18 per cent. Jaitley not only rejected the idea of a statutory or mandatory limit of 18 per cent on GST, he also refused to include high revenue potential petroleum products, electricity, some tobacco products, and no alcohol at all in GST. This resulted in a confused multi-rate system, which then had to be seriously modified, and now finally they have arrived at a stage where almost 25 States, I understand from reports, need compensation for lost revenue from earlier State taxes.

So, in a round about way, the money that has been taken from the consumer is being transferred to the States. This was not at all the theoretical pattern in which the GST was envisaged when Pranab Mukherjee first introduced the Bill back in 2012.

The government’s fiscal math is going wrong, but it believes it is facing the challenges and not pushing them under carpet (like UPA)…

It is the poor who are facing the challenge upfront and paying for it, not Jaitley. The Finance Minister is squeezing every single pie out of their pockets to contain his numerous deficits.

I floated a fantasy about it, yes. Then I set up a committee under Krishnamurthy. His report came, but it went completely against the idea. So, I then decided to set up a committee that was trying to see how we can reconcile the Krishnamurthy Committee suggestions with what I, as Minister, had fantasised about doing. However, the task was left incomplete when I was “relieved” within 20 months of taking over. Now, Jailtley has picked up the same gauntlet but Pradhan seems to have made little progress in actually getting such a mega company off the ground.

Finding our own resources! If you recollect, I was at loggerheads with the late Subir Raha, former Chairman ONGC, because, on the one hand, Reliance Industries Ltd were receiving rave headlines in India and abroad on all these vast discoveries in the Krishna Godavari Basin offshore, and CM Modi’s Gujarat State Petroleum Company (GSPC) was flaunting its assets in the same basin. I took Raha to task, and Raha — I really want to apologise to his memory — took a very sober line that none of these claims had been authenticated by the Directorate General of Hydrocarbons. He tried, on this basis, to justify ONGC’s non-performance. I have to acknowledge that Raha was right, not in defending ONGC’s non-performance, but about the claims of Reliance and GSPC, which now turn out to have been somewhat economical with the truth!

We were and are a seriously gas deficient country. I believed in Vijay Kelkar’s remark made at a lecture in 1996 that while petroleum had been the engine of growth in the 20th century, it would give place to natural gas in the 21st century. So, we shifted focus to gas exploration on-shore and off-shore in our country and abroad, liquid gas imports in an extremely tight market, regasification plants on both coasts, the Iran-Pakistan-India and TAPI gas pipelines and a vast increase in our domestic gas pipelines network.

In this context, an idea started to get floated that we should replicate Indraprastha Gas Ltd in more and more cities. Against this background, Prime Minister Modi announced in March 2015 that piped gas connections would be made available to a crore of households during his regime. But, now that we are coming to the twilight of that regime, it has at best reached 45 lakh, mostly in the mega metros. Not even half the target been realised.

And this is because not only is there no additional gas, pipeline laying has also sharply decreased. Whereas the length of gas pipelines laid rose sharply from about 11,000 km to well over 17,000 km between 2007 and 2013, it has since plateaued, hardly 700 km have been laid in the last four to five years.

Besides, the body to regulate the gas transmission business and license city gas companies — the Petroleum & Natural Gas Regulatory Board — was left headless for a long time and without the quota of members required to even convene the Board for months together. So, if there is no gas, and no pipeline network, no authority to conduct the auctions, then where are the 200 city gas companies promised by the Prime Minister?

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