Slicing Up The Burden

With food inflation at nearly 17 per cent, the Centre faces a Hobson's choice on fuel (diesel, kerosene and LPG) subsidy sharing. And the finance ministry and petroleum ministry have locked horns over this issue. The finance ministry claims that the losses of the oil marketing companies (OMCs) are inflated as they are calculated on notional costs. Petroleum ministry officials, on the other hand, argue that FinMin should follow the corporate dharma for the sector, which is among the biggest revenue earners for the exchequer. The OMCs generate nearly Rs 1.2 lakh crore for the Centre and nearly Rs 77, 000 crore for the states.

In the current scenario, increasing the price of fuel would hardly be an option for the government. Global crude prices are in the region of $90-94 per barrel. That is unlikely to ease with an intense winter in Europe and the US. At this level, the under-recoveries for the OMCs is in the region of Rs 6 for every litre of diesel sold. It increases to Rs 20 per litre for kerosene and Rs 366 for each LPG cylinder of 14.2 kg. State-run OMCs including Indian Oil Corporation (IOC), Hindustan Petroleum Corporation, and Bharat Petroleum Corporation would have under-recoveries of Rs 73,000 crore this financial year, much higher than the Rs 46,000 crore in the last fiscal.

The finance ministry is not willing to accept these numbers and has asked for a fresh calculation of the subsidies. The petroleum ministry points out that these are all listed companies. The impact will be visible in their third quarter results. If the government does not come up with the sharing programme, the books of all the OMCs will be splashed in red. This would be bad news for IOC, where the government is set to offload a 10 per cent stake to raise about Rs 24,000 crore. Moreover, losses would also mean low valuations; and this would make it difficult for these companies to raise funds for foreign operations and acquisitions.

The finance ministry doled out Rs 13,000 crore for the first two quarters and it is open for sharing one-third of the annual losses with subsidy. And that means the balance 66 per cent of the losses would have to be cushioned by the upstream companies such as OiI India and Oil and Natural Gas Corporation, along with the OMCs.

However, this is not acceptable to the petroleum ministry. It wants the finance ministry to allow it a subsidy of 55 per cent of the under-recoveries with 10 per cent borne by the OMCs themselves. The balance could be borne by the upstream companies. Petroleum minister Murli Deora met Prime Minister Manmohan Singh and demanded Rs 10,000 crore as subsidy. Although the government has deregulated petrol prices, it is unlikely that it would do the same for diesel in the near future.

Another option that the government is considering is to reduce the excise duty on fuel — it is at about 40 per cent of the refinery cost. The petroleum ministry feels taxes should be reformed both at pre-refinery and post-refinery stages. These taxes form more than 50 per cent of the price of the fuel at retail outlets. The subsidy-sharing programme is likely to take some time to be finalised. The forthcoming Union Budget could bring news on the excise duty cut. Till then, you and me have to grin and bear.

(This story was published in Businessworld Issue Dated 24-01-2011)