A rock and a hard place

The FM must try to communicate the long-term implications of the oil subsidy regime to his political colleagues

Written by Vikram S Mehta | Published:April 2, 2012 2:14 am

The FM must try to communicate the long-term implications of the oil subsidy regime to his political colleagues

Two known knowns of the budget. One,the finance minister cannot meet his commitment to limit the subsidy outgo on petroleum products to Rs 43,000 crore without raising the price of diesel,kerosene and LPG. Two,the day he announces such a price hike,the opposition parties will bay for his blood and the government will struggle to hold onto power. One known unknown. If business continues as usual,and the oil marketing companies (OMC) IOC,BPCL and HPCL continue to haemorrhage cash because of the government’s diktat to sell below cost,the banks will eventually stop lending; the companies will default or delay on payments; investments will get curtailed; and the public will face fuel shortages. When such a situation will come to pass is not known. That it will,is a near certainty.

So the question has to be asked. What can the FM do to extricate himself from the space between a rock and a hard place into which he has apparently wedged himself? How can he translate his ambitious budgetary intent into reality? The economic answer is straightforward. He must raise prices. Subsidies should be given but directly from the exchequer and into the bank accounts of identified beneficiaries. The Aadhar scheme should be the instrument for this transaction. The oil companies must not be asked to bear this burden. The FM has in fact outlined these measures in his budget. The political answer is,however,more complicated. There is no clear pathway and he may have to experiment. One route that has not been tried and which he could consider is education and information.

Politicians in all countries are grappling with the ramifications of high oil prices. For instance,US president Barack Obama’s election prospects hang on the thread of gasoline prices. If Israel attacks Iran’s nuclear facilities and gasoline prices push beyond $4 per gallon,Mitt Romney may well end up in the White House. Leaders elsewhere in Europe and Asia Pacific are also facing a similar public challenge. They have also had to resort to subsidies to manage the political fallout of high oil prices. Our FM is therefore not alone in his space. Where he is somewhat isolated is in the treatment of petroleum companies. It is only in India that companies have been burdened with the subsidy bill.

The FM knows the long term implications of this burden. He knows that the companies have had to cut back on essential investments in infrastructure,asset maintenance,safety,etc. and that they have had to in effect mortgage the petroleum industry’s future to safeguard the politicians’ present predicament. His political colleagues are not,however,as well informed. The FM needs to therefore sensitise them. He needs to alert them to the cliché that chickens do come to roost and that financial profligacy will inevitably stoke a political crisis.

Political parties are not democratic organizations. Mamata Banerjee,Jayalalitha,Naveen Patnaik,Nitish Kumar,Mulayam Singh Yadav,Prakash Singh Badal,Sharad Pawar,Sonia Gandhi,etc. run their political parties like feudal baronies. Their word is law. While this does not speak well of intra-party democracy,it does make it simpler to influence party policy. One person has to be made to see the light not a coterie of individuals. The FM could start his campaign by educating these leaders.

In parallel,he should also prepare to educate the relevant public. I have personally never been persuaded that people are fundamentally resistant to policies that impose short-term pain against the promise of long-term and more durable gain. Certainly,the very poor cannot be expected to make short-term sacrifices. For them the long term is a chimera. But they are not the class that needs persuasion. They are not the people that come onto the streets. It is the aspirational group above them who are now on the treadmill of growth that are most voluble. They are the ones that need education and who need to be made aware of the long term consequences of the current pricing and subsidy regime. So what messages should be conveyed through this campaign? Here are my suggestions:

The OMC’s “under recovered” approximately Rs1,35,000 crore in FY 2011-12. This loss was compensated in part by the finance ministry and in part by the upstream companies ONGC,OIL and GAIL. A significant portion however was borne directly by the OMCs themselves.

The consequential cash loss compelled them to borrow to finance their working capital and to pay their international suppliers. In FY 2011-12,these erstwhile debt free companies racked up a debt in excess of Rs 1,25,000 crores,the interest on which is not compensated.

The OMCs postponed or slowed down work on new refineries and petrochemical projects; they curtailed investments in import terminals pipelines,depots,etc; they pared down their R&D budget and they reduced expenditure on safety and maintenance. The recommendations of the committee that investigated the IOC Jaipur tank farm fire has,for instance,not yet been implemented.

The staff of the OMCs are demoralised. Their bonuses have been reduced because,as per the recommendations of the Pay Commission,their variable pay is linked to performance. These reductions are perceived to be unfair,as poor performance is the result of government policy and external factors beyond the staff’s control.

ONGC/OIL/GAIL,who bear approximately one-third of the “under recoveries”,have cut down on exploration and production activities.

The cumulative impact of the above is a slowdown in the development of indigenous hydrocarbons; the stalling of infrastructure investment required to meet rising demand; the compromising of safety and maintenance standards; the hold back of technology and innovation and the undermining of the employer value proposition.

This will inevitably deepen the energy crisis and at some point lead to fuel shortages. The voter backlash then will be more severe than anything politicians might face today.

The writer is chairman of the Shell Group in India.
Views expressed are personal

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