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Raghuvir Srinivasan

Simply put, the cross-subsidisation among oil products in existence under the administered pricing mechanism (APM) would continue after it is dismantled on April 1, 2002 albeit in a different form. The fall in global oil prices has come in handy for Mr Sinha. He has appropriated for the Government what would otherwise have been passed on to consumers as lower fuel prices.

EVEN the best of accountants could learn a thing or two in deft accounting from the Finance Minister, Mr Yashwant Sinha. His has been a solo performance in the migration of subsidies on LPG and kerosene from the Oil Pool Account to the Consolidated Fund.

Mr Sinha may appear generous in continuing with the subsidies but the fact is that he is generating the resources required for it from the very same constituency which was paying for it earlier.

Simply put, the cross-subsidisation among oil products in existence under the administered pricing mechanism (APM) would continue after it is dismantled on April 1, 2002 albeit in a different form.

The fall in global oil prices has come in handy for Mr Sinha. He has appropriated for the Government what would otherwise have been passed on to consumers as lower fuel prices.

Going by Mr Sinha's own numbers, petrol prices ought to drop by as much as Rs 8 per litre in the free market scenario after April 1. But it will not happen thanks to the long arm of the Finance Minister. He has levied a surcharge of Rs 6 per litre of petrol apart from continuing with the Re 1 per litre cess for road development.

Mr Sinha has, of course, been magnanimous enough to pass on Re 1 per litre to the consumer as a price reduction. This must be financial engineering at its best.

Just consider his proposals to mobilise revenue from petroleum products. Customs duty on kerosene for public distribution system is to be doubled to 10 per cent. Excise duty on LPG, kerosene and CNG for automobiles (Delhiites to note) is to be raised from eight per cent now to 16 per cent.

The cess on crude oil levied on producers such as Oil and Natural Gas Corporation and Oil India is to be doubled from Rs 900 per tonne to Rs 1,800 per tonne.

The surcharge of Rs 6 per litre on petrol is over and above all this, and is nothing but a blatant attempt at continuing the cross-subsidisation regime.

All this would go to pay for the 15 per cent and 33 per cent subsidies on LPG and kerosene respectively.

Mr Sinha has cleverly played with numbers in the case of petrol. He has dropped the ad valorem excise duty from 90 per cent to 32 per cent but this drop has been quantified in absolute terms and imposed as the Rs 6 per litre surcharge.

He has also smartly protected his expenditure in a possible scenario of rising oil prices by specifying subsidy as a flat rate rather than in percentage terms.

For instance, if subsidy were to be pegged at 15 per cent on LPG, then it would rise and fall in tune with global crude oil prices. A flat rate would remain unaffected by fluctuations in global oil prices.

Thus, in a regime of rising oil prices, consumers of kerosene and LPG would see a rise in their outgo even after the subsidy from the Government is accounted for.

The outstanding balance in the Oil Pool Account will be liquidated by issuing bonds to the oil companies. This is small solace to them, considering the pressure on their cash flows caused by large outstanding amounts.

At best, it will guarantee the return of their money to them and at worst, it means that they would have to raise alternative resources in the short term to compensate for the drop in cash flows.

Mr Sinha has probably done the right thing in continuing with freight subsidies for LPG and kerosene to the hinterland area, but there is no mention of what would happen with the other products. Will consumers in the far-flung areas have to pay more for petrol and diesel than those near refineries? This issue appears to have been left undecided.

The announcement of the Petroleum Regulatory Board is a welcome one, but it remains to be seen how quickly it is constituted. With the free market just a month away, the urgency for such a board cannot be overemphasised as a number of unforeseen issues could emerge post-deregulation.

There remain a number of issues to be addressed yet. The artificial pricing on petrol and diesel would probably continue till subsidies on LPG and kerosene remain, and Mr Sinha has set himself a generous time frame of 3-5 years for that.

Consumers who were waiting expectantly for the APM abolition in the hope that fuel prices would fall have reason to feel disappointed as what Mr Sinha has presented is nothing but the APM and its associated evils in a different avatar.

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