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Hard options in oil pricing

The Rangarajan panel wants subsidies to be minimal and targeted

IT COULD be a few days or just hours away for the retail prices of petrol and diesel to go up, enabling the national oil marketing companies (OMCs) to partly cover the growing under-recoveries from sale of the products below cost.

One of the widely discussed issues in the media in recent times, the indication of a fresh increase in prices, after nearly nine months, in the wake of high crude oil prices, however, is just one side of the story.

The other side is about the likelihood of the Government not raising consumer prices of domestic liquefied petroleum gas (LPG) and kerosene, two of the heavily subsidised petroleum products. Such a possibility is one thing that most in the oil industry dread, given the issues associated with the misuse of the subsidy.

Moreover, the difference between the retail price and the cost is substantial for the oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP. While the estimated under-recovery for every domestic (14.2 kg) cylinder is around Rs. 115, it is over Rs. 16 a litre for kerosene.

Abuse of subsidies

The subsidy on cooking gas and kerosene and the associated issues, however, have not gone unnoticed. There is "overwhelming evidence'' to show that the policy of giving kerosene at subsidised prices under the public distribution system to all consumers regardless of their economic status does not make economic sense. It has resulted in waste, leakage, adulteration and inefficiency, as pointed out by the Rangarajan committee on pricing and taxation of petroleum products.

"We therefore recommend restricting subsidised kerosene to the below poverty line (BPL) families. This will reduce the quantity of PDS kerosene going through the subsidised route by about 40 per cent from the present level,'' the committee has said. This is a something that many in the OMCs also emphasise. Their concern is driven more by the menace of kerosene being used as an adulterant in diesel, sometimes to the extent of a substitute.

Possible alternative

Citing an example to highlight the magnitude, a senior official of the oil industry says when additional allocation of kerosene was made to Tamil Nadu during the unprecedented rain in the last quarter of 2005 immediately afterwards diesel sales plunged considerably. The Rangarajan committee also has pointed to a recent report of NCAER estimating that 38 per cent of the PDS kerosene is diverted for non-PDS use.

One possible measure that could address the issues, particularly diversion and adulteration, is door delivery of kerosene to eligible households by the oil companies. The official asserts: "If we [OMCs] could reach cooking gas cylinders to lakhs of families, we could also take kerosene to their doorsteps.'' Such a move, he hopes, would plug the loopholes resulting in leakage of the heavily subsidised product.

But like the larger issue of reducing the subsidy, the door-delivery proposal requires a strong policy push, political will, and the willingness of agencies now engaged in distribution and enforcement to exit the scene. The committee says the subsidies should be "minimal, targeted and restrained by a monetary ceiling.'' Further, it wants the burden borne entirely and transparently by the Union Budget.

Silent spectators

However, "the only fool proof mechanism for preventing leakages and diversion is to move towards a system of a single price at the point of retail sale for all consumers with the subsidy being passed on to BPL consumers through alternate mechanisms.''

While the OMCs largely remain silent spectators to the happenings in kerosene marketing, it is not the case with regard to domestic LPG. The spiralling crude oil prices and a near static retail selling price have made them put the brakes on their marketing efforts, restrict issue of new connections and even ration refill cylinders.

By contrast, three years ago the OMCs had resorted to some aggressive marketing, flooding their distributors with stocks and even issuing multiple connections. The 21-day restriction, back in the limelight now, was dumped and customers got their cylinders within hours of booking.

This led to a situation where households had (multiple) cooking gas connections of all the companies and were using the cylinders to run their cars. Many of the cylinders also found their way to commercial establishments, hotels, roadside eateries and tea stalls. Apart from the misuse, such practices posed safety hazards.

Little wonder then that the Rangarajan committee says: "The subsidy regime in domestic LPG is by far the most egregious and distortionary of all the subsidies in the oil sector.'' Noting that the BPL households constitute hardly 10 per cent of the total domestic LPG consumers, it says, "Providing subsidy of this order to what is overwhelmingly a non-poor segment of the society, especially in the context of fiscal stringency, is clearly indefensible."

Removing the subsidy on domestic LPG is an urgent imperative, it says, recommending an immediate one-time upward adjustment in the price by Rs. 75 per cylinder and gradual increases thereafter with a view to eliminating the subsidy altogether, something that is unlikely to happen. The OMCs do not seem to be keen to expand their retail network under the prevailing conditions. This could just be the beginning of the stagnation of the companies.

"The Government will not only forfeit the taxes and dividends that it has been getting from these companies but will have financially crippled companies on its hand, which will be unable to make the much needed capital expenditure required for expansion and modernisation,'' says the Rangarajan committee.

N. RAVI KUMAR

in Chennai

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