Are we slipping on oil?

The price of crude oil has touched $100 a barrel. India does not have adequate reserves...

The price of crude oil has touched $100 a barrel. India does not have adequate reserves of crude oil. Moreover, public policy for tackling this vexed issue has been populist. To contain inflation and to avoid ruffling political feathers, governments have refused to raise the prices of petrol, diesel, kerosene and LPG. This has resulted in huge losses to state-run oil refining companies. So what happens now? Amitav Ranjan gives the big picture

• Why has the rising price of crude oil become a cause of concern for India?

India lacks sufficient reserves of crude oil. Also, it has limited monies at its disposal to finance the state-run oil refining-cum-marketing companies that are losing money due to the freeze on consumer prices.

• Why has the government not raised consumer prices of the four fuels?

With international crude prices on a consistent uptrend since 2003-04, the retail prices of the four products should have been gradually raised. However, the government adopted a populist stance in the face of state elections by advising the oil marketing companies (OMCs) to keep consumer prices under check. There are also concerns that raising fuel prices would trigger inflationary pressures. The clamour by Left parties has also served to dampen the initiative to align the prices. But eventually, the consumers and the economy may be faced with a larger price shock and adjustment than what was originally avoided.

• What is the extent of financial loss to OMCs?

The long-term mismatch between domestic and international prices has put fiscal pressures on the OMCs which are simply too heavy for the oil sector to remain financially viable. They were able to report annual profits, despite large under-recoveries in 2005-06 and 2006-07, due to government support. If the external support in the form of oil bonds, discounts and sales of shares were excluded, they would have reported losses. Moreover, they need Rs 15,729 crore to fund their capital expenditure in future refineries, green fuel projects and in exploration and production to meet the hydrocarbon needs of the nation.

• What is the financial position due to the current crude surge?

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Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum are projected to lose Rs 69,753 crore on sale of four products as the Indian basket of crude oils has touched a record-high of $92.29 per barrel. Petrol is being sold by them at a loss of Rs 8.74 a litre, diesel at Rs 9.92 per litre, kerosene Rs 20.53 a litre and LPG at a loss of Rs 256.35 per cylinder. The government approved oil bonds worth Rs 23,457 crore in October to partially offset the losses, but an equal amount is required to make them break even.

• What are the options available to the government?

With customs and excise duties already removed on subsidised kerosene and LPG, customs duty on petrol and diesel reduced by 2.5 per cent and LPG placed under ‘Declared Goods’, the government can at best cut the customs duty on crude oil to 3 per cent from the current 5 per cent. The dismal growth of 1.5 per cent in central excise receipts from petroleum products may discourage the finance ministry to bring down the assessable value of petrol and diesel by a further cut in their excise duty. The promise to pay in the form of oil bonds could be increased while effecting a Rs 4 and Rs 2 a litre price increase in petrol and diesel.

Much would depend on the national policy on subsidies that is being worked out by the finance ministry following a call by the prime minister to usher transparency and better targeting of subsidies, and the group of ministers headed by Pranab Mukherjee which has been appointed by the cabinet to suggest alternatives on pricing of petroleum fuels.

• Other non-financial options before the government?

Since much of the subsidy on kerosene and LPG gets siphoned away from the intended users, the government plans to cut its subsidy outflow on kerosene by 40 per cent by restricting supplies to BPL households. The diversion of LPG cylinders to commercial establishments shall be restricted by introducing an electronic tracking system in the form of electromagnetic cards and radio frequency identification. To check adulteration of kerosene in diesel, the government has launched a scheme of mixing a marker chemical in kerosene. In order to make available a reasonably priced alternative to PDS kerosene to those who have higher purchasing power, the OMCs are proposing the sale of non-PDS kerosene in one litre bottles for which they have asked the finance ministry to abolish excise and customs duties.

amitav.ranjanexpressindia.com