Subir Raha


In international trading, commodity prices vary constantly; this is true for the Indian market as well, except for petroleum products. The government sets the prices for the four products of mass consumption—cooking gas, petrol, kerosene and diesel, and the oil marketing Companies (OMCs) do it for the remaining products. Either way, these changes happen without any given periodicity and without any logical correlation to input costs or international prices or intrinsic value or substitution costs or perceived value. Either way, the prices are cartelized by the multiple public sector marketers.

Can a growing Economy be nurtured this way? How does anyone, homemaker or CEO, plan cash flows based on surprises? Obviously, there has to be a base-line. Budget is the base-line for the national Economy; there is a second, secret base-line: the oil Economy budget (OEB). This second book of accounts is nearly equal in size. The income from OEB (customs & excise duties, OID cess, education cess, highway cess etc. which are all “manners of excise”, royalties on oil & gas production (for onshore production, the states have a share), service tax, signature bonuses, share of “profit oil & gas” as and when the NELP discoveries actually go into production, and for the Companies under the administrative control of the ministry of petroleum & natural gas, proceeds from equity sale, dividends on original and bonus shares all go to the Union Government, and the deficits are loaded mostly on the oil Companies where the government is only a part owner (the government presently holds all the equity in Oil India Ltd). The OEB is based on an assumed price of the “Indian basket” of crude, and this itself is a questionable calculation. The subsidy from the producing Companies is extracted as “discount” at the top-line, and therefore, profits get understated; consequently, all the investors get short-changed. All the refiners, whether in public—or private sector, are “protected” as the “gate prices” are benchmarked to international prices.

The State is responsible for citizens’ welfare. The Constitution does not provide for assignment of this obligation to business entities incorporated under the Companies Act, irrespective of the pattern of equity ownership. Cost of subsidies, therefore, should be totally and transparently loaded on the National Budget. The transparency is important. It is said that the governments in power actually hope to sit in opposition when the oil bonds become due for redemption. Are these bonds counted in the national debt? There was a time when funding from World Bank and IMF was crucial for economic survival; today, ONGC, and to a much lesser extent, OIL, GAIL, IOC, BPC and HPC have that dubious distinction. What happens when the golden goose is dead? In late 2005, ONGC’s creditworthiness in forex terms was ranked two notches above the sovereign rating, the highest ever rating achieved by any Indian company so far; what will be the rating today? Who will provide the corporate guarantees and funding for acquisition of oil & gas assets abroad or is it the intention to close down ONGC Videsh as was proposed in mid-nineties? Who will take the overwhelming load of exploration risk in India, and fund re-development of the ageing fields? Is it the intention to repeat the history of the early nineties when ONGC’s producing fields were privatized for a song, allegedly for ONGC’s inefficiency? Coming to the OMCs, what is their actual investment in building new refining capacity in this decade, and how does it compare with the private sector’s record? Cosmetic upgrade of petrol pumps is surely not capacity-building.

The Rs 3 per litre increase in diesel price before adding taxes while keeping kerosene price unchanged “in the interest of the common man”, means minimum Rs 3,000 incremental profit in each kilolitre of kerosene adulterated into diesel; sales tax on kerosene is much less than that on diesel, again “in the interest of the common man”. According to NCAER studies commissioned by the Government, at least 30% of the subsidised kerosene goes into diesel. A conservative estimate will be say, 30 lakh kilolitres annually. So, the black-market has benefited by minimum Rs 900 crore every year. Coming back to the tradition of two sets of accounts, how many of our politicians are dealers or transporters for kerosene and diesel, mostly in benami ?

The reverse is the case for LPG cooking gas. The price of subsidised LPG for households has been increased but the price of non-subsidised LPG for commercial and industrial use remains unchanged. So, the “spread” on diversion of the red cylinders to the blue cylinder market gets correspondingly reduced. As the states reduce sales tax on subsidised cooking gas, this “loss of profit” gets restored!

When will the orchestra strike up next—at 160 dollars a barrel?

The Financial Express, New Delhi
The author is former Chairman, ONGC and Chairman, trIdea Ltd....