Not a politically acceptable formula
Nov 01 2013
Parikh’s recommendations will not restore our oil economy’s health
For decades, India has subsidised all petroleum products. Since over 77 per cent of our crude requirement is imported, even a sneeze in the global crude market causes a severe cold in the Indian economy.
To absorb some of this oil-induced shock, the NDA government of Atal Bihari Vajpayee had drawn up a three-pronged strategy. Any increase in oil subsidy or price increase caused due to global crude volatility was to be apportioned between companies like Oil India, ONGC on the one hand and the government on the other.
A part of the burden was passed on to end consumers through increases in retail prices of LPG, kerosene, petrol and diesel in a phased manner. The then petroleum minister Ram Naik increased petroleum product prices 13 times in just a year, though in small doses.
This well-oiled mechanism to bring petroleum product prices in sync with market gradually was derailed by the UPA government. It was done mostly for political reasons. To appease voters on some occasions and some times may have been justified due to high inflationary pressures. It was only in 2010 that this government woke up to the mess it had landed the economy in due to adverse impact of its inaction on the hydrocarbon front.
After Kirit Parikh outlined the way forward in 2010, the UPA government began gradual calibration of petroleum products prices in right earnest. Petrol is now sold in sync with global market movements of crude. The diesel price is increased by 50 paise each month to free up resources for development projects.
But the hike is insufficient, given the huge build-up of under-recoveries with state-run oil marketing companies that totaled to a staggering Rs 7,28,463 crore in last ten years.
Parikh’s latest recommendations were aimed at getting the state-run oil companies out of a mess and free up resources for their expansion as well as acquire global oil assets. He suggested this be done through an alternative methodology to price cooking gas, diesel and kerosene to restore the balance in the hydrocarbon economy.
However, except for minor tinkering with the formula for pricing these products, Parikh seem to have lost sight of the larger plot. In case the government goes ahead with this plan, Rs 13,500 crore of additional revenue will accrue to oil marketing companies and private refiners like Reliance and Essar.
His other suggestion is to go in for a one-time Rs 5 increase in diesel price, Rs 4 in kerosene and Rs 250 per cylinder of cooking gas to make up for the time and money the UPA government lost in moving towards market rates. Parikh has also suggested that the government limit the subsidy burden on ONGC & OIL.
Fact is these three steps do not address the basic distortions in prices of petroleum products; nor do they de-link the Indian economy from external crude shocks, nor spur investments in the hydrocarbons sector.
The first basic distortion that needs to be corrected: while gross refining margins of private companies like RIL and Essar have shown a gradual increase to $ 9.20 per barrel, why is it that state-run refiners continue to post either negligible or negative returns from their businesses?
One would have expected Parikh to make specific recommendations to improve the state-run companies’ $ 2 margins and to bring them on par with RIL and Essar.
Parikh’s team should have taken a re-look at central and state taxes and duties to fine-tune the retail prices or offset the subsidy outgo. In the short term, such action would have been more relevant as under-recoveries are likely to rise to Rs 2,00,000 crore next year.
Recommendations for a one-time large increase in diesel and kerosene prices may not be palatable for the UPA government which continues to face trouble in garnering popular support for its economic policies, more so in the run up to the elections.
Take for instance, the point of limiting the number of subsidised gas cylinder supplies to six a year per household. Congress chairperson Sonia Gandhi had taken the lead to get it increased to nine cylinders in her party-ruled states; BJP states too followed suit to retain their following. It makes sense to reduce the subsidy on cooking gas. But, then a workable and politically acceptable formula is what one expected from Parikh. All he has done is reiterate a rejected recommendation.
Parikh does not address the larger issue of insulating the economy from external oil shocks and foreign exchange volatility. For instance, should the government not source more crude through currency swaps, say with Russia and China? One needs to consciously pursue rupee-denominated or non-dollar trade in oil with countries like Iraq as with Iran. This will lend stability and predictability to crude availability, pricing and foreign exchange reserves management.
It was expected of Parikh to chart a medium term plan to increase oil and gas asset investments abroad, either by going solo or in partnership with other developing countries.
Without keeping the big picture in mind, recommendations of Parikh to increase compensation to refiners and retail prices will not work to restore health to our oil economy. The UPA government may have to take a wholesome view on hydrocarbon economy rather than deal with rates on a piecemeal basis in a very ad hoc manner.