FROM BUSINESS WORLD OF 6 APRIL 2006
Affordable
subsidies
For a while,
socialism was triumphant; the Indian oil industry was entirely state-owned in
the 1980s. In the early 1990s, the idea flickered that competition was better
for the consumer than socialism. So refining licences were given to Reliance
and Essar, and hope to Shell. Exploration licences were auctioned in a series
of NELPs. But once the economy boomed and the need for rationality passed, the
government returned to thinking of oil as a ‘strategic’ industry. For appearance’s
sake, ab exploration licence or two were given to Cairns; but most went to ONGC
and Reliance. Only government companies were allowed to set up new refineries.
Under socialism,
the prices consumers paid had nothing to do with the prices the refiners were
given. Whatever was earned was filtered through Oil Price Equalization Fund; it
was used to tax petrol and subsidize whatever the politicians thought would
bring them popularity – kerosene, high-speed diesel and liquefied petroleum gas
(LPG). But as young India began riding scooters, taxing petrol was also lost
political correctness; so government oil companies bore a rising proportion of
the subsidies. They complained, and the government finally listened. In 1998,
it announced that it would abolish cross-subsidies and let the cost of imports
determine prices by 2002.
However, when
2002 came, Ram Naik, did not abolish subsidies; he promised to do so, but
slowly – over 3-5 years; the government would bear their cost meanwhile. That
resolve too crumbled; next year, the government forced the oil companies to
bear the subsidies.
The Congress
that came to power in 2004 only shared the name with the Congress that
liberalized the economy in the early 1990s. It inherited a strong economy, so
it was free to return to folly. There was a new leader in the old Nehru-Gandhi
mould. The new Congress came to power just as crude oil prices began to rise.
It took away oil companies’ power to decide oil product prices, and told them
that they could raise prices only when it told them to do so - which it did not
do too often.
So the cost of
subsidies to oil companies started rising; in this financial year, it will come
to Rs 266 billion – Rs 153 billion on kerosene and Rs 113 billion on LPG. Petrol
and diesel prices also have been kept down; on them, the oil companies reckon
losing 160 billion. That, on a rough reckoning, is 13 per cent of their
turnover. These cash cows were bleeding. The government gave them a blood
transfusion – it cut excise and customs duties – that was too little. In
2003-04, the oil marketing companies – IOC, HPC, BPC and IBP – had made a
profit of Rs 108 billion. Next year it came down to Rs 72 billion. This year
till December, it had turned into a loss of Rs 20 billion. Oil prices are
rocketing, so oil and gas producers – ONGC, OIL and GAIL – should be minting
money. But because they are being made to share the subsidies, their profits
have also come down from Rs 170 billion in 2004-05 to Rs 148 billion in April-December
2005. Socialism is rapidly becoming unaffordable.
So the
government appointed the Rangarajan committee. It had four economists, one
management expert, and only one bureaucrat; it looked as if the government
really wanted rational advice.
The committee
recommended that import-parity pricing of oil products should be replaced by a
80:20 blend of import-parity and export-parity, since about 20 per cent of the
oil product production was being exported. Since the difference between the
export and the import price is sea freight - about 10 per cent – the committee
recommended a 2½% reduction in maximum prices in effect. These prices should apply at ports; inland
prices should also include cost of transporting the products from the ports.
That would make products cheaper near ports and more expensive further away.
But more important, it would allow each company to fix its own prices;
centralized price fixing would go. The committee proposed a reduction in
customs duty on petrol and diesel from 10 to 7.5 per cent, and a shift from ad
valorem to specific excise on them. Price of an LPG cylinder should be raised
by Rs 75 and kerosene subsidy should be given only to BPL card-holders; that
would save about 40 per cent of the Rs 266 billion oil companies lost. Most of
the rest should be raised from a cess on domestic oil production, which would
replace the present arbitrary impositions by the government. In other words,
ONGC would continue to bear it. That would leave roughly a third of the Rs 400
billion the oil companies say they are losing. If they are right, they will
raise prices much more than the committee estimates. So I am doubtful of its
arithmetic. I also think that confining subsidy to kerosene for BPL will
increase its diversion to the black market from the present 40 per cent.
