Sliding along on oil

UPA-II seems to have finally discovered a sense of humour, and a wicked one at that. With the Kirit Parikh report in place, the pink papers were busy speculating that the question was no longer “when” but by “how much” the prices of at least petrol and diesel would be raised. The report, appearing just before the budget, made a strong case for moving end-user prices of petroleum products in line with international trends. With the marketing companies reporting under-recoveries Rs 3.10 on each litre of petrol, Rs 2.55 on diesel, Rs 17.30 on kerosene and Rs 241 on each cylinder of domestic LPG (all December prices) the bill for the year FY 2009-10 was estimated to be Rs 45,500 crore. Of this, the government itself will be providing a mere Rs 12,000 crore. “Upstream” companies — GAIL, ONGC, and OIL — will pitch in with about Rs 11,000 crore; the oil marketing companies will absorb the remaining Rs 23,000 crore. 

Consequently, the Parikh Committee argued that the current pricing non-regime had decimated any cash surplus available with downstream as well as upstream companies. The latter were being forced to dole out ad hoc price discounts on crude supplied, thereby reducing funds for investment in domestic and overseas exploration. With a frightfully wilful compensation mechanism, the companies found it difficult to plan any investments. India is one of the few countries where the government neither provided for all the subsidy nor allowed end-prices to be passed on to consumers. It therefore had no option but to pass it on, or to provide for the under-recoveries of the state-owned marketing companies that, following the pricing non-regime, were the only ones left selling liquid fuels in the domestic market anyway.   

The Finance Bill pulled a fast one. It cheekily left actual prices untouched but raised the excise duty on both petrol and diesel. It restored the customs duty on both products to June 2008 levels, making it 7.5 per cent instead of the existing 2.5 per cent and slapping on an additional Re 1 per litre excise duty for good measure. Simultaneously, it also imposed a 5 per cent duty on crude imports. What’s important is that even as it leaves the oil companies’ bleeding balance sheets unattended, this garners Rs 30,000 crore more for the government in FY 2010-11. Therefore the shadow boxing being done by UPA’s friends and foes for a rollback of “prices” actually lacks a killer punch — simply because what they are demanding is not so much a rollback of prices but one of taxes meant to collect revenues for the UPA’s flagship social sector schemes. So when the PM and the FM declare there is going to be no rollback, they can do so with a moral authority lacking on the other side. Had they actually raised prices that would have not been the case. So the UPA has the last laugh on this one.  

What the additional Rs 30,000 crore also does is that it gives the government headroom to manoeuvre in case crude oil prices were to head north again. Duties can in that case be re-jigged without affecting end prices and oil companies just about kept afloat. With no allocation proposed, all it means is that the finance ministry will continue to make ad hoc cash allocations to partially finance under-recoveries. Pushed to the wall, it may yet go in for more oil bonds. So it is going to be business as usual for some more time.  

For the sake of record, the finance minister has indeed said that a decision will be taken to implement the Kirit Parikh report in “due course”. Petroleum Minister Murli Deora also continues to indicate that a decision on the report will be taken soon. However, given the vociferous walk-out in Parliament and the allies’ histrionics, the government is unlikely to have the stomach to further mark-up petrol and diesel prices to the market — and increase the price of  kerosene by Rs 6 a litre and LPG by Rs 100 as recommended by the Parikh Committee. 

With no provision being made for “oil bonds” as a compensation mechanism and cash subsidies remaining at earlier levels, the policy message on the oil and gas front is clear: the government remains unconvinced by the Rangarajans, Chaturvedis and Parikhs. The allocation column under “Compensation to oil companies for under- recoveries on account of sale of sensitive petroleum products” in 2010-11 is marked “nil”. Reforms in the oil and gas sector are not the immediate priority. Oil companies, both public and private, should they have surpluses which remain uncollected, are advised to sequester them in war chests for better opportunities overseas. 

Source: http://www.indianexpress.com/news/sliding-along-on-oil/586663/0


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