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Opaque delivery of subsidies

THE DECISION TO ask the public sector oil companies to bear the burden of the subsidy on LPG and kerosene is a shortsighted move, made quite obviously with an eye on the coming State Assembly elections. Last month the Petroleum Minister, Ram Naik, announced a "freeze" on the prices of these two items until February 2005. Cooking gas and kerosene continue to be subsidised long after the prices of other petroleum products such as petrol and diesel have been decontrolled and allowed to move up or down in line with the international prices of crude. The budget has provided for Rs.4700 crores by way of subsidy. That has been found grossly inadequate in a context where international prices are ruling firm. The latest Government decision will result in an additional burden of Rs.8200 crores for this year alone. Not the exchequer, but the public sector oil companies — the upstream ONGC and GAIL as well as the marketing companies, Indian Oil, HPCL and BPCL — have been asked to meet the additional burden, with the latter group bearing the lion's share. Reliance, which is into refining, as well as the two stand-alone public sector refineries, Chennai Petroleum and Kochi Refineries, have been exempted from the subsidy obligation.

The new arrangement is unsatisfactory in several ways. It is a throwback to the period before April 1, 2002 when petroleum prices were administered by the Oil Coordination Committee through the oil pool account. That system was based on the principle of cross-subsidisation, with consumers of petrol and diesel meeting a part of the expenses of those using kerosene and LPG. The latest decision of the Government brings back price controls as well as cross-subsidies in a convoluted way. The public sector oil companies will have vastly reduced margins from their normal operations after meeting the demands of subsidy. A very likely deleterious consequence: domestic retail petrol and diesel prices will continue to remain high even when international prices, to which they are now benchmarked, soften. There will be far less transparency in the way their prices are arrived at. The investment plans of the petroleum companies, so vital to their survival in an increasingly competitive and globalising industry, will suffer because of the extra burden. All the petroleum companies now have a substantial number of public shareholders; their interests will be seriously compromised by the latest decision. The valuations of companies such as BPCL and HPCL, candidates for privatisation, will naturally flounder. At a time when the petroleum sector is being criticised as a `laggard' in the economic reform process, the backdoor entry of administrative pricing will be far from helpful.

The arrangement is also plainly discriminatory. It has kept out the only major private sector player in the field from having to share the subsidy burden. Already among the public sector companies, there have been major concerns over the absence of a level playing field. An even more basic question needs to be addressed. Should the Government continue to provide a subsidy to LPG consumers? While there is some justification for providing relief to kerosene users, cooking gas can by no stretch of imagination be called a poor man's fuel. It is the middle class, a major beneficiary of the reform process thus far, that is the biggest consumer of LPG. Thanks largely to this fact, consumption of LPG has grown by a hefty 75 per cent over the past five years. Clearly, the Government is bent on wooing a key political constituency. In the process, it has harmed the companies owned by it and set the clock back in a critical sector.

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