FROM BUSINESS WORLD OF 16 AUGUST 2005.
Huffing & puffing
If one had to describe the government’s policy on oil
prices in a word, it would be labour-intensive. It seems that Mani Shankar
Aiyar is always on the point of running somewhere in pursuit of prices – going
to see the Prime Minister, going to a cabinet meeting, meeting Leftist leaders,
or talking to the press about any or all of the above. And he does not labour
by any means alone; he makes everyone whom he meets sweat too. That is a lot of
steam being expended over a single policy issue. And the outcome is usually
nil: most of the time, nothing happens to the prices, and when it does, it is a
fraction of what needs to be done.
For despite the price increases,
the government has allowed prices to fall so far behind costs that the oil companies
made losses in the second quarter of 2005. That is a dubious first. For the
price ONGC gets for its domestically produced oil is so much higher than cost
that it requires genius for it to make a loss. And the refineries receive such
high protection on value added that they have much fat to shed before they
begin to bleed. And yet the government has managed to liquidate their margins.
All the companies – except a
couple – have shares in the market, and have been favourites of investors for
their high profits and low risk. What the investors had ignored, or forgotten
about, was political risk. Now they have been rudely reminded of it, and they
will not forget in a hurry. Government oil companies will be severely marked
down. As long as the communists have anything to do with it, it is unlikely
that the oil companies will be allowed to raise risk capital in the market. But
if they ever do, investors will remember their owner and extract a pound for
the government’s unreliability as the majority investor.
That risk would disappear if the
government privatized the companies; but a Congress-led government is unlikely
ever to do that, and if ever it has such unholy thoughts, the communists will
stop it in its tracks.
Short of privatization, the best
thing the government could do to eliminate political risk would be to give the
oil companies autonomy. If it did, the oil companies are bound to raise prices
to landed cost. The government could bring down landed cost to the cost of
imports by eliminating customs duties. Apart from bringing down prices, that
would force the oil companies to become internationally competitive. If there
is to be any taxation, it should be taxation of consumption in the form of
value added tax.
This would be the ideal policy in
the present political circumstances; the government should make an effort to
convince its communist allies that it is. Only they think that oil products are
for the poor. Countries where personal vehicle ownership is considerably higher
and oil products are more of mass consumption goods extract considerable
revenues out of oil taxation. In this country where personal vehicles are still
for the few and where roads are getting impossibly congested, the case for
taxing oil consumption is all the greater. The only exception may be kerosene.
But the kerosene subsidy is misdirected to a considerable extent; much of it
goes to those who adulterate diesel oil with kerosene.
Perhaps for that very reason, the
subsidies find strong defenders amongst politicians, and are difficult to
remove. Even then, the government should work out a way of limiting the oil
subsidies. One way of doing this would be to leave oil companies free to fix
prices, but to impose negative taxes on oil products. If this were done, the
subsidies would come out of the general budget and would become subject to the
budgetary discipline.
However, that is likely to be
unwelcome to the finance ministry. The fiscal balance is already severely
strained by the expensive rural employment guarantee scheme; in the
circumstances, Mr p Chidambaram is unlikely to countenance another open-ended
drain of money.
In those circumstances, the
government may have no alternative to cross-subsidies akin to what is in place
just now. But even if it is left with no other option, it is necessary to make
an estimate of the oil companies’ capacity to give cross-subsidies and to make
sure it is not exceeded.
Further, the subsidies will
probably go further if their administration is left to the oil companies. On
the basis of their capacity to cross-subsidize and the likely annual
consumption, it would be possible to work out approximate per litre subsidies.
These subsidies should be determined and then kept unchanged for a year at a
time. During the year, oil companies should be free to fix product prices and
to vary them in response to changes in import prices. At a time when there is a
world shortage and when prices are rising month by month, nothing else is
workable.
