One of the planks on which Modi got mandate to govern was his promise to deliver on fiscal consolidation. In its maiden budget for 2014-15, government has pledged to achieve this by pruning subsidies and higher tax revenue based on lower rates. Recently, prime minister approved constitution of an expenditure management commission (EMC) under chairmanship of Dr Bimal Jalan former governor RBI to recommend a road-map up for rationalizing and phasing out major subsidies viz., food, fertilizers and oil. The commission has been asked to submit its report within 18 months. However, it will submit an interim report in 6 months. The protracted time frame for the committee should not be taken to mean any dilution of government’s commitment on this crucial reform....
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Category: Oil & Gas
Food, fertilizers and fuel – need ‘overhaul’, not just re-routing of subsidy
In its maiden budget presented on July 10, 2014, NDA-government has announced setting up of an expenditure reforms commission (ERC) that will examine all subsidies viz., food, fuel, fertilizers and come up with a road map for restructuring them. Further castigating existing dispensation as one that does not target beneficiaries (read poor) and leads to ever rising ‘un-quantifiable’ subsidies, it has promised to switch over to a scheme of direct cash transfer (DCT) to poor in a focused and transparent manner. Since then, it is close to a month and ERC has not been constituted as yet. At this pace, we can’t expect its recommendations before end of current year. Therefore, any major restructuring may have to wait at least...
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A crude anti-reforms attitude
Unkind burden And illogical too jorgen mcleman / shutterstock.com The Gujarat government’s efforts to squeeze out more royalty from ONGC could impact production and exploration The Modi government is keen to take up administrative and judicial reforms in a big way, but the actions of the Gujarat government may become a stumbling block. A case in point is the Gujarat government’s decision to collect a royalty of 20 per cent on the discount given by the Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. It stands to reason that royalty or cess should be levied on the sale price (after discount), as has been established by precedent as well. However, the Gujarat government’s...
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Prune subsidies vide censoring producers
Contrary to expectation, there was no big bang reform in regard to subsidies in Modi-government’s maiden budget presented on July 10, 2014. However, Arun Jaitley announced setting up of an expenditure reforms commission (ERC). While, we may have to wait for ERC recommendations until next budget in February, 2015, meanwhile Jaitley has given some ideas on direction in which government intends to move forward. Thus, he opines that extant dispensation of subsidies which he describes as ‘un-quantifiable’ and beneficiaries ‘un-identifiable’ cannot be allowed to continue. He emphasized need for replacing this by a system of direct subsidy transfer to poor. To countenance menace of subsidies, Jaitely alluded to fundamental need for consumers/users to pay for increase in cost of goods...
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ONGC resources eroded by un-warranted levy and subsidy sharing
At a time, when Modi dispensation at the centre has pledged to take up administrative and judicial reforms in a big way, it is confronted with a legacy where actions of none other than Gujarat government may be becoming a stumbling block. A case in point is latter’s decision to collect royalty of 20% on discount given by Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. The decision was upheld by Gujarat High Court (GHC) which on Nov 30, 2013 ordered ONGC to pay dues of around Rs 10,000 crore retrospectively from April, 2008. ONGC challenged GHC order in Supreme Court (SC). On February 13, 2014, SC stayed GHC’s order but directed ONGC to...
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KG-D6 gas fiasco – defending the ‘indefensible’
In any natural resource-based industry where exploration, development and commercialization of a resource involves substantial investment, the investor has to be extremely careful and circumspect. Before initiating the project and spending money, through a rigorous and scientific process involving inter alia surveys and complex exploration techniques, the company must make a credible assessment of the quantum of resources in place and projection of viability taking in to account the production and likely price. For a resource like gas which belongs to the nation and where necessary investment running in to billions of dollars are allowed to be fully recuperated ‘up front’ by the operator under production sharing contract (PSC), the bar in terms of ‘credibility’ and ‘authenticity’ of reserves in...
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RIL/BP/Niko exploit ‘fault line’ in Rangarajan formula – for a bonanza
On January 10, 2014, Government had notified new guidelines for pricing of domestic gas applicable from April 1, 2014 that would lead to doubling from current US$ 4.2 per mBtu. Even as EC has deferred its implementation for now, meanwhile, fertilizer industry has got another shocker. In the gas sales purchase agreement (GSPA) for supplies from D-6 block of Krishna-Godavari (KG-D6) basin, Reliance Industries (RIL) has proposed that government fixed rate will be charged on gross calorific value (GCV) basis instead of current practice of charging on net calorific value (NCV). It also moots marketing margin of US$ 0.135 per mBtu on GCV basis. For arriving at price applicable to all domestic gas, Rangarajan formula takes average of hub prices...
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Gas pricing – plunder camouflaged as incentive
The anti-corruption branch (ACB) of Delhi Government – On Kejriwal’s behest – has filed FIR against Veerappa Moily et al for criminal conspiracy to double gas price to US$ 8.4 per mBtu (million British thermal unit) from April, 2014. He opines this will give a windfall of Rs 54,000 crores annually to RIL which produces gas ‘allegedly’ at cost of US$ 1 per mBtu. However, Moily justifies saying ‘system of pricing is based on expert advice’. So, what system has government adopted? RIL discovered gas in D 1&3 fields in KG basin in 2002. It was awarded these fields under NELP-I in 1999. Under production sharing contract (PSC), price was to be market determined keeping in mind ‘arms-length’ principle and...
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One step forward, two steps back
If raising the cap on subsidised LPG cylinders was bad enough, withdrawing Aadhaar linked payouts was disastrous The UPA Government is prone to talking loud on economic reforms. Yet, it is reluctant to take hard decisions. The government committed two blunders recently: it backtracked on the LPG subsidy reduction and — what’s worse — withdrew the direct benefit transfer (DBT) scheme. By doing so, the government has let go an opportunity to prune massive leakages in food, fertiliser and LPG subsidies and bring about a much-needed fiscal correction. Let us first look LPG subsidies. Flip-flops all along Prior to 2002-03, sale of LPG (besides diesel and kerosene) was subsidised under an administered pricing regime. This was paid for by higher...
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A crude demand for royalty
SUMMARY The subsidy ONGC gets on crude sales to downstream oil PSUs is not a part of its sales realisation and, hence, Gujarat’s demand for high royalty is illogical While administrative and judicial bodies are expected to aid the process of economic reforms, they sometimes tend to obstruct the smooth conduct of business. A case in point is the decision of Gujarat government to collect a royalty of 20% on the discount given by Oil and Natural Gas corporation (ONGC)—an upstream central oil & gas PSU—on the sale of crude to downstream oil PSUs. The decision has been upheld by the Gujarat High Court, which has ordered ONGC to pay dues worth R5,000–6,000 crore retrospectively from 2008. ONGC is already...
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