In a bind over soaring oil - The Hindu

K.Venugopal

With the oil bill this year likely to be as much as the entire net tax revenue of the Central government, over Rs. 500,000 crore, the government has been left with little room for manoeuvre.

Every time one of those large supertankers takes on a consignment of 250,000 tonnes of crude oil at a West Asian port for delivery to a refinery in India, the oil company that wants to buy the cargo has to open a letter of credit for over Rs. 1,000 crore. “The amounts have become so large that there are few banks in India that can handle such deals on their own,” remarked a director at one of India’s large private sector refineries. His refinery buys four tanker loads of crude oil a month; the country needs about 480 such loads a year. At today’s price, the total value of crude oil the country will consume this year will be as much as the net tax revenue of the Central government, over Rs. 500,000 crore. That is the scale of the oil economy, and the problem that has been spawned by the doubling of the price of crude oil in just 12 months.
Rising under-recoveries

It is not just the refining companies that are struggling to write out the cheques. Private sector oil companies, of course, are saving their skins by exporting much of their products profitably at international prices, which generally rise in tandem with that of crude oil and provide pure-play refiners with adequate profit margins. On the contrary, public sector oil companies are not so well placed. They now pay the substantially higher price for crude, but get more or less the same price for the products they market to domestic customers with the government maintaining a tight lid on what they can charge. While the prices of LPG and kerosene have remained unchanged, those of petrol and diesel have increased but marginally over the past year. As a result, under-recoveries at the public sector oil companies are Rs. 600 crore a day, and unless compensated adequately and quickly, they will soon run out of cash. If they are then unable to keep the petroleum pipelines full and flowing, the consequences for the economy will be disastrous.
The options

Such is the bind the government is in. As the owner of the public sector oil companies, it has to prevent them from going bust. There are three different pockets it can pick some extra cash from: One, it can ask consumers to pay more; two, it can ask ONGC, the oil-producing company to give up some of the windfall gains made on domestically produced oil; and three, it can ask the oil marketing companies to thin their profit margins. Indeed, over the past year, as oil prices gradually crept up, all three ideas were used. Consumers were asked to bear a nominal increase in the price of diesel and petrol; aviation turbine fuel prices were also marked up requiring passengers to pay a higher fuel surcharge. ONGC was granted only a little more than half the international price for the oil it produced. As these measures were inadequate, the government issued bonds to the oil companies that they could hawk in the market and add the proceeds to their sales revenue. With those in the account books, the public sector oil companies were able to show an 18 per cent growth in profits in April-Dec 2007 over the same nine months in 2006. For the government, the oil bonds are a clever accountant’s creation; they are like any other form of borrowing, but they will not be shown as part of the fiscal deficit. A future generation of taxpayers will repay the bondholders and bear the burden of keeping petro prices steady for today’s consumers.

Never mind the murmurs and misgivings from the various quarters, the accounting jugglery was able to keep the system up and running till March. With crude oil prices continuing to rise steeply, what the government is confronted with now is a much bigger problem, and worse, there is much less room for manoeuvre. If global prices of crude oil stayed at the current level through the year, the oil companies will lose close to Rs. 200,000 crore. The obvious solution is to increase prices for consumers. That would send the signal the market usually puts out for consumers to curtail their consumption. An increase in use efficiency usually results and that will not be such a bad thing considering the effect the burning of fossil fuels has on the planet’s climate. Yet with the general elections less than a year away, the government seems to worry more about the impact an increase in petroleum prices will have on the general inflation level, which is already above 7 per cent. From hindsight, it is easy to say that the government ought to have let petroleum prices find their market levels a couple of years ago when inflation was low, at around 4 per cent. In any case, that opportunity was lost.

To keep consumer prices where they are, the Opposition parties have suggested that the Centre reduce taxes on petroleum so that the oil companies can keep more of the consumer rupee. On the face of it, this appears a reasonable suggestion but it could be both inadequate and unfair. The Centre collected about Rs. 71,000 crore in excise and import duties on petroleum in 2006-07, which means that even if the duties were forsaken entirely, they would provide just 40 per cent of the need. On the other hand, without such revenue the budget would be weakened leading to spending cuts on many a social programme. While petroleum is used in the production of most goods and even services, not every one in the population enjoys it in equal measure. Just one third of the country’s households, for instance, use LPG in the kitchen. Of course it is much the cleaner fuel, and every attempt must be made to make it more accessible. But as things stand, the less fortunate in the population, who make do with firewood and farm residue, gain nothing from a stable LPG price. It would be a rather unjust denouement if a reduction in any government social programme should impact this section of society.

Surprisingly State governments have not figured in this debate thus far. They are no mean players in this stage, earning collectively over Rs. 62,000 crore in sales tax on petroleum products in 2006-07. Will they be called upon to make a sacrifice in revenue this time?

If the past is any guide, the Central government will be tempted to issue more oil bonds, which means postponing the hard decision, thrusting the burden on the next government, while making it appear that it has handled the situation. By all accounts, it will succumb to that. It will also deny ONGC the full international price for domestic oil, and it will ensure that the oil marketing companies make minimal profits.
More efficient use

Having worked its creative accountants to the full, the government may claim it has won the battle, but it will lose the war. The proper response to a doubling in the oil price would be to ensure a more efficient use of the resource that the world knows is limited and exhaustible. At less than three million barrels of oil out of the 86 million the world consumes each day, India is by no means a large consumer. Yet consumption is rapidly gathering pace, and that is not just because of the fast-growing economy and the commensurate need for transportation. With electricity generation capacity not rising fast enough — only half the capacity increase promised in the Eleventh Plan (2002-07) did fructify — there is an exceptionally large-scale use of petro fuels to generate power both for the grid and for captive use. Rural electrification has made slow progress, forcing farmers to fall back on diesel pumps. Coastal shipping and inland water transport, that imply more energy-efficient cargo movement, have not found official encouragement.

On their own, consumers do respond appropriately to price signals; they know how to moderate consumption when the purse is pinched. If the government insists on shielding its consumers from global price changes, then it must take on the role of modulating consumption. Some one will need to bear the pain.

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