India's oil sector reform a mirage?

According to 2009 Economic Survey, the under recoveries in oil sector was a staggering Rs 1,03,000 crore for the year 2008-09. This is 85 per cent of the total income tax collected in that period. If to these under recoveries is added the cost of tax losses by diverting PDS kerosene to blend with higher valued products, diversion of domestic LPG to commercial and automotive sectors, impact on governance by black money generated in oil sector, the oil sector subsidies are indeed the source of the mother of all corruption.

Soon after the swearing in of the new UPA government, Petroleum Minister Deora announced that he would like to give freedom to oil companies to fix prices. As a result, Essar, which had closed its petrol stations decided to open them. But Reliance waited for the government to actually put into practice its avowed policy.

When the crude oil price started their climb from 2003, the government took over the responsibility of fixing oil prices from the state-owned oil marketing companies. It was only in April 2002, with great fanfare the Administrative Pricing Mechanism (APM) first established in 1976, had been dismantled.

Out of business

It is because of the deliberate policy of Indian government not to pass on the costs of increased crude oil prices, oil marketing companies had huge under-recoveries. The delinking of downstream product prices from crude oil prices led to the closure of oil pump stations of Reliance, Shell and Essar in recent years curtailing any competition to public sector oil companies.

Planning Commission’s Integrated Energy Policy (IEP) published in 2006 has been critical of the lack of competition in the oil sector and government’s interference in the price administration post APM. The government ignored IEP’s recommendation.

Often quoted Rangarajan Committee report, published in 2006, also strongly recommended the government “to keep at arms length the price fixing in oil sector and allow flexibility to oil companies to move with the international oil market.” The report also recommended that the entire cost of oil sector subsidy be met from the budget rather than the current ad hoc and non transparent system of sharing it through oil bonds and transfer of funds from upstream companies.

As oil prices were sky rocketing in 2008, another high powered committee under the chairmanship of B K Chaturvedi was formed to look at the deteriorating financial positions of oil companies. Like other previous high powered committees this committee too recommended disengaging from the process of fixing prices of petroleum products.
When it made its recommendations, crude oil prices were at their highest level. However, now with lower crude oil prices, this is the most opportune time for the government to get out of the complex task of fixing prices without causing any social and political unrest. Unfortunately, the government does not seem to be in any mood to do so.

Political protest

Every time the government increases petroleum product prices, opposition parties protest. Most of the politicians may be honestly believing that higher product prices will harm the common man through increased inflation. The government has a responsibility to educate the political class, and civil society how the poor are hurt the most by not allowing the cost pass through.

Since India imports more than 73 per cent of its oil requirement, higher oil price is a ‘petro tax’ imposed on Indian economy by oil exporting countries. By forcing oil marketing companies to reduce profits or even lose money, the government is helping the rich and middle class who are the consumers of petrol, LPG, and diesel in the short term. Those below the poverty line are not affected directly by petro price increases. Even a little increase in inflation caused by total cost pass through will have minimal impact on the poor.

However, the poor are affected the most when the government has to absorb the cost of higher oil prices when they keep product prices low. With lower revenues the government will not be able to spend the needed funds for welfare projects on health, education, employment generation, etc which will help the poor.

If the government does not bring about the much needed reform suggested by all the high powered committees, there will come a time when our well managed ‘Navaratna’ companies will become like state electricity boards and India’s well constructed infrastructure to supply petro products will collapse.

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