The Hindu Business Line : Subsidy on kerosene and LPG

THE jostle has begun in right earnest. With the Government failing to make up its mind on the system of sharing subsidies, the oil companies have begun playing their own little games to influence the former's thinking.

And, thus, you have Mr Subir Raha, Chairman and Managing Director of Oil and Natural Gas Corporation (ONGC) demanding, that the Government refund to his company the Rs 2,690 crore that it paid in 2003-04 as its share of subsidy on kerosene and LPG.

Having capitulated to the government earlier, Mr Raha appears to be simply taking an extreme bargaining position in order to ensure that the government does not extend last year's subsidy sharing scheme that lapsed with March 31 into the current fiscal.

Under this scheme, the subsidy on LPG and kerosene was to be shared by ONGC and GAIL India along with the refining companies, Bharat Petroleum, Indian Oil and Hindustan Petroleum.

The day after Mr Raha's statement in Mumbai, representatives of the refining companies met the Petroleum Secretary in New Delhi and informed him that a couple of them were set to report a loss in the first quarter of this fiscal. They even quantified it — Bharat Petroleum was likely to post a loss of Rs 28-32 crore while IBP's was likely to be higher at around Rs 40 crore.

This was obviously again a tactic to pressure the Government lest it changed its mind on the subsidy-sharing scheme and let ONGC off the hook. The latter's grouse has been that the refining companies are making enough and more profits to cover up for the subsidy between themselves.

Mr Raha's contention is also that ONGC is getting a raw deal as it already heavily subsidises gas users by supplying gas at artificially low rates of around $1.10 per million British thermal unit when the market price is more in the region of $4.6.

Nervous reactions

The one signal coming out clearly from all these manoeuvres is that the oil companies are nervous about the mounting subsidy burden on them.

They were forced to share among themselves a whopping Rs 8,200-crore subsidy deficit during 2003-04. This year is projected to be worse with the deficit pegged at Rs 9,000 crore in the Budget.

The Government has pared its own subsidy burden to Rs 3,500 crore in the Budget from Rs 6,300 crore in 2003-04. The signal could not have been clearer for the oil companies which were hoping that the subsidy-sharing mechanism would be discontinued.

With the government refusing to allow an upward revision in the prices of LPG and kerosene by the marketing companies and also reducing its own share of the subsidy, it is inevitable that the oil companies will once again be called to carry the can.

Clarity on sharing

Now comes the crucial question of how the sharing will be done and this is where the Government, by maintaining silence despite the lapse of almost four months in the current fiscal, has encouraged the oil companies to play games with one another.

What is now needed is clear direction from the Government on how the oil companies should share the subsidy amongst themselves. Last year, the standalone refining companies — Chennai Petroleum, Kochi Refineries, Bongaigaon Refinery and the only private player, Reliance Industries — were spared with the subsidy being shared by the refining and marketing companies, and ONGC and GAIL India.

Ideally, the oil companies should not be required to share the subsidy with the government; but once that principle is breached, there appears no logic why only some companies should take the burden even as the others get away.

If the subsidy is to be shared by the oil companies, then the standalone refiners also ought to be brought under the net. It is not an equitable system where the marketing companies alone bear the burden with the upstream players. This is something the government should address when it finalises the sharing mechanism.

Long-term plan needed

That said, the Government should also come out soon with a long-term plan that will either phase out subsidies or at least ensure that it is funded from the Budget. Even as other sectors, such as telecom, banking and insurance, are benefiting from reforms, the oil sector, sadly, is retreating into the dark days of control and subsidies.

The oil companies need the cash that they generate to invest in further exploration or in modernising their refineries or building new ones.

It is wrong for the government to sap them of this money that would otherwise go into investments in productive assets in a critical sector of the economy.

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