Back The Oil scenario — Need for a comprehensive response
S. D. Naik
| From fully compensating the oil marketing companies by raising prices of petroleum products and reducing the subsidy element to exploring alternative renewable energy sources such as wind, solar and biomass, the response to the runaway hike in crude prices must be holistic. The strategy should include not only a pragmatic pricing policy for petroleum products, but also long-term measures to take care of the country's energy security, says S. D. Naik. |
The average annual price of crude oil was $25, 29 and 37 a barrel during the three calendar years ending 2004. In 2005, the running average went past $50 a barrel and is rising with the international crude prices crossing $67 a barrel. However, the Government has still not allowed the OMCs to raise the retail prices of petroleum products because of the stiff opposition from the Left parties and some of the other allies.
The under-recoveries during 2004-05 on PDS (public distribution system) kerosene and domestic kerosene were estimated at Rs 17,720 crore, and petrol and diesel Rs 2,190 crore. Thus, the total under-recoveries during the year amounted to Rs 19,910 crore, up from Rs 9,370 crore in 2003-04. In the first quarter of 2005-06 (April-June), the estimated under-recoveries of the OMCs were Rs 4,900 crore on petrol and diesel and Rs 4,800 crore on PDS kerosene and domestic LPG.
The OMCs incurred substantial cash losses in the first quarter of this fiscal. While Indian Oil reported a loss of Rs 54 crore — the first in its history — Bharat Petroleum and Hindustan Petroleum posted losses of Rs 431 crore and Rs 508 crore respectively. The meagre price increase of Rs 2.59 and Rs 2 per litre of petrol and diesel respectively from June 20 has failed to provide much relief to the OMCs and the cash losses suffered by IOC, HPCL and BPCL in July were Rs 1,516 crore.
The situation is clearly unsustainable. According to the Petroleum Minister, Mr Mani Shankar Aiyar, if the current trend of huge under-recoveries leading to losses suffered by the OMCs continues, the under-recoveries for 2005-06 are likely to exceed Rs 40,000 crore pushing the OMCs deeper into the red.
Because of the huge under-recoveries, the market borrowings of the OMCs are now at an all-time high. Consequently, the shareholders, including the Government, may not get dividends next year. The price control on petroleum products will not only hurt the profitability of the OMCs but the Government will also lose substantial revenues by way of tax on profits and excise duties. This, in turn, would push the government to more borrowings and squeeze public investment in many crucial areas.
The cash losses of the public sector oil companies will affect their investment plans this fiscal.In view of the worsening situation, the Federation of Indian Chambers of Commerce and Industry (FICCI) has urged the Government to make serious efforts to reduce the burden of the OMCs because of the under-recoveries. It has stressed the need to make provisions to distribute the impact of rising international oil prices amongst all stakeholders.
As per an analysis carried out by the industry body, the sustained rise in global crude prices has sent India's oil import bill soaring by 42 per cent to Rs 1,16,806 crore in 2004-05. It is projected to shoot up by another 48 per cent to Rs 1,72,326 crore this fiscal. The additional outflow of Rs 55,520 crore or $12.8 billion on account of oil imports would more than gobble up the additional export income of $ 8 billion targeted for 2005-06, the Chamber said in its note.
The Associated Chambers of Commerce and Industry (Assocham) has also warned that if the prevailing distortions and inadequacies in the petroleum price mechanism and the existing tax structure are not corrected, the resultant chaos is certain to hurt the long-term health of the economy.
In this situation, it is inevitable that the prices of petroleum products are hiked soon. The Petroleum Minister and the Finance Minister have indicated as much. The Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, has also expressed a similar view. But given the staunch opposition of the Left parties, the hike will be far from adequate to compensate the OMCs for the losses they are incurring It may be recalled that on the basis of the recommendations of the Strategic Planning Group on Restructuring of Indian Oil Industry headed by Dr Vijay Kelkar, and an Expert Technical Group headed by Mr Nirmal Singh, there was a phased deregulation of the oil sector.
In the first phase effective April 1, 1998, the administrative price mechanism (APM) was dismantled for the upstream and refining sectors, while there was partial deregulation of the marketing sector. Subsequently, with effect from April 1, 2002, the Government announced complete dismantling of the APM.
Ironically, however, as the international crude prices began flaring, the Government effectively brought back the APM by dithering on allowing price hikes at the retail level. Even when the prices were decontrolled for a brief period and the OMCs were given the freedom to fix retail prices on a fortnightly basis, the prices were revised only after an informal clearance from the Ministry of Petroleum. After January 1, 2004, the Ministry began to deny clearance for price hikes for petrol and diesel; PDS kerosene and domestic LPG were spared from price increases even earlier.
So there has been a complete mockery of the so-called dismantling of the APM. There were only two small increases in the prices of petrol and diesel on June 16, 2004, and June 20, 2005. When the petroleum sector was deregulated, it was decided that the subsidy on kerosene supplied through the PDS would be maintained at 33 per cent and that on LPG at 15 per cent. Now the estimated subsidy on kerosene is 127 per cent (selling price Rs 9.02 and subsidy Rs 11.45 per litre) and the subsidy on domestic LPG is 32.67 per cent.
As the situation is threatening to go out of control, now there is a talk of a moderate hike in the prices of petrol and and a small addition to LPG with some reduction in tax burden. There is no doubt that the tax burden on petroleum products in India is quite high and it needs to be brought down.
According to the Sixth Report of the Standing Committee of the Parliament on Petroleum and Gas, which submitted its report recently, taxes and duties levied on these products, including by the States, are the highest in the world at about 132 per cent of the basic price.
True, the Government did reduce the excise duty on petrol from 30 per cent to 26 per cent and on diesel from 14 per cent to 11 per cent effective June 16, 2004. It was further reduced to 23 per cent on petrol and 8 per cent on diesel from August, 2004 along with a reduction in excise duty on PDS kerosene from 16 per cent to 12 per cent. Simultaneously, the Government also reduced the Customs duty on petrol and diesel from 20 per cent to 15 per cent. In view of the continuing rise in international prices, these duties may have to go down further.
Unfortunately, all price hikes as well as duty reductions so far appear ad hoc, lacking in transparency and indicating no proper direction or purpose. For instance, while the Government wants to subsidise retail prices of kerosene and domestic LPG, it does not do it entirely through budgetary support. The OMCs are made to bear a substantial portion of it by cross-subsidising these products through higher prices of auto fuels.
It is, therefore, time the Government formulated a comprehensive strategy to deal with rising crude prices. The strategy should include not only a pragmatic pricing policy for petroleum products, but also long-term measures to take care of the country's energy security. Keeping prices artificially low will result in inefficient energy use. Already India is rated as one of the most energy-intensive economies.
According to the International Energy Agency (IEA), the energy intensity of the Indian economy is nearly three times that of developed countries. Hence, all efforts are needed to ensure that the energy intensity is reduced through technological improvement and increased productive efficiency. According to energy experts, the price signals in the economy should be used to trigger inter-fuel substitution and curb wasteful use of energy.
Serious efforts are also needed to formulate aggressive oil conservation programmes. This is all the more important because India's oil import dependence is expected to go up from 70 per cent now to 85 per cent in the next 15 years. In India, the elite consumes a major chunk of the petroleum fuels. Hence, this section should be made to pay the full long-term cost of the fuel they consume, even as relief is provided to the poor.
As suggested by the Parliamentary Standing Committee, the Government should explore on top priority the development of alternative energy sources. Coal being our major energy source, there is a need to formulate specific plans to enhance coal bed methane production, coal gasification, coal-cleaning technology and so on. Adequate attention should also be given to the use of ethanol blending.
Another area that remains grossly neglected is the exploitation of the huge potential of renewable energy resources. There is a need to resort to increased use of wind, solar, and biomass sources to generate energy. Recently, the Prime Minister, Dr Manmohan Singh, suggested that every village should have a community biogas plant of its own and electricity should reach every household.
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