THE POLITICS AND ECONOMICS OF OIL PRICE HIKE
By Ruma Dubey
For Mrs.Desai just putting food on the table for her family seems to have become an ordeal. The price of basic necessities of life has reduced her savings by more than half. Vegetables and fruits apart, her EMI for the house and two-wheeler loans have gone up. With subsidy on LPG getting curtailed, price of petrol and diesel constantly on the rise, life has become all about budgets and cost cuts in this household. Actually, it is the story of almost every middle class household.
Today, oil and gas sector stocks are up on hopes that the Govt will announce a diesel price hike. When the market cheers, surely it is bad news for the ‘aam aadmi’. As usual, the Govt say’s that it is inevitable but for Mrs.Desai and scores of others in India, one is unable to understand this ‘inevitability’ of the Govt. On TV, those in the know, are seeing the price of crude coming down currently, so why the price hike now?
Well, the economics and politics of oil is much more slimy and slippery than the price of crude alone. It is a catch 22 situation for the Govt. It bleeds the oil companies if it keeps the prices intact and if it hikes the prices, it will bleed the people of India further. For many, the way the oil pricing works remains a mystery. Well, here is an attempt to put this across as simply as possible so that it makes easy understanding of the subsidy mumbo jumbo and the case being built up for another round of price hike.
How this works is that Govt subsidises fuel prices. OMCs or the Oil Marketing Companies – HPCL, BPCL and IOC buy fuel from upstream companies ONGC, GAIL and Oil India. The upstream companies buy crude at global prices and hence sell at global prices. But this results in huge under recoveries for OMCs, meaning loss between their purchase price of crude and the retail price at which they sell the fuel. To help tide over the under recoveries, Govt issues oil bonds and gives cash subsidies. These are usually issued out of the Oil pool account and not out of the Budgetary allocations, which otherwise would have inflated the fiscal deficit further. So one pertinent point here – the already dangerous fiscal deficit levels we see today does not include these oil payouts and if that were to be included, the Indian economy could been placed under ‘junk’ status long time ago.
So how is this subsidy distributed? OMCs under recoveries are to be borne by upstream companies, which is at 33%. Under this, ONGC bears the lion share at 82%, GAIL at 7% and OIL’s share is at 11%. In FY11, there was a change in the subsidy-sharing formula for upstream companies wherein they had to share the subsidy based on their past three years' average profit ratio rather than the last one year's., Apart from this 33% under recovery burden shared by companies, similar amount is contributed by the Govt by way of cash subsidy and the rest is either absorbed by the retailers or passed on to consumers.
In FY12, under recovery was to the tune of Rs. 138,541 crore of which 40% came in from the OMCs. This was at Rs.55,000 crore, up from Rs.30,297 crore in FY11 and in FY10, their contribution was at Rs.14,430 crore. As against this, in FY12, the Govt gave via cash subsidy, Rs.83,500 crore, in FY11 it was Rs.41,000 crore and Rs.26,000 crore in FY10.
PSU OMCs are estimated to end the current fiscal with an under-recovery loss of over Rs 1,63,000 crore on sale of diesel, domestic cooking gas (LPG) and kerosene. Rs 60,000 crore is to come from upstream companies and the Govt is to compensate the rest by way of cash subsidy.
The Govt has made a total provision of only Rs.43,600 for oil subsidies of the total budget. In FY12, the Govt was to bear a Rs.83,500 crore but of this, the Govt funded only Rs.45,000 crore of that shortfall and the balance Rs.38,500 crore was paid out this fiscal. And this fiscal, nine months have already gone and contribution from the Govt is yet to come and the Govt is left with a subsidy of merely Rs.50,000 crore. So the Govt has used money of FY13 for paying off expenses of FY12 and now, it is in a fix which is why it needs another price hike.
After all this numerical mumbo jumbo, the bottomline is that another fuel price hike is due any time now. But how much and for how long will this skewed oil subsidy work is the big question.