The BJP must now stop the practice of asking oil companies to give discounts to downstream PSUs
Presenting his first maiden Budget in July 2014, Union Minister for Finance Arun Jaitley had accepted the daunting challenge to retain the fiscal deficit target for 2014-15 at 4.1 per cent. On February 28, while presenting the Budget for 2015-16, he reported that the target had been achieved. However, this achievement was at the cost of massive reduction in plan expenditure from the Budget estimate of Rs5,75,000 crore to about Rs4,68,000 crore as per revised estimate, a fall of Rs1,07,000 crore.
For this, one cannot blame the present Government as ,when it came to power, it had inherited a weak economy which resulted in a massive drop in tax receipts from about Rs13,64,000 crore (Budget estimate) to Rs12,51,000 crore (revised estimate), a fall of Rs1,13,000 crore. Since the BJP Government came to power in May 2014, it has taken several steps to unclog many jammed projects and revive investor sentiment. But it would be naïve to expect immediate results in terms of boosting growth and resultant tax buoyancy.
However, one area where the present Government missed a golden opportunity relates to the process of disinvestment from sale of equity in public sector undertakings. Against a target of about Rs43,000 crore, it could garner only Rs26,000 crore. A big disappointment was the Oil and Natural Gas Corporation. The Government was gunning for realisation of about Rs18,000 crore from disinvestment of its five per cent holding, but it was eventually dropped. The overriding reason for this was a steep decline in market price of its share from Rs472 in June, 2014, to Rs320 currently, and also a lukewarm investor perception.
Why has the investors’ initial enthusiasm fizzled out? This has a lot to do with the indecision of Mr Narendra Modi — dispensation on contentious issue of ‘sharing burden of under-recovery on the sale of LPG and kerosene’ with upstream oil and gas majors viz, ONGC, Oil India Limited and Gail. First, let us put a few facts in order. For over three decades, due to prices control of these products (on diesel till October 2014) at levels below the production cost, downstream PSUs, viz Indian Oil Corporation, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited, suffered under-recovery on their sale.
Prior to 2003, these losses were cross-subsidised by surpluses from the sale of naphtha, fuel oil, low sulphur heavy stock, aviation turbine fuel to industries at prices much higher than cost. These inflows and outflows were administered through the Oil Pool Account, which ran co-terminus with the administered price regime. Depending on the international price of crude versus the price of products, the OPA ran into surplus or deficit at different times.
In 2002-03, the then NDA Government, under the leadership of Mr Atal Bihari Vajpayee, dismantled the APR and wounded up the OPA. Even as it continued the sale of diesel, kerosene and LPG at low prices, it decided to fund consequential under-recoveries directly from the Union Budget. This was also a precursor to a phased programme for progressive elimination of subsidies in a time-bound manner.
Unfortunately, the UPA Government was never serious about reducing subsidies. Yet, it was keen to avoid stress on the Budget. Therefore, it came up with an ingenious idea to direct ONGC, OIL and GAIL to offer a discount on the supply of crude to downstream oil PSUs from October 30, 2003 — a policy which continues till date.
Till 2013-14, ONGC alone cumulatively contributed a total of around Rs2,73,000 crore towards under-recoveries of oil PSUs. During the first half of 2014-15, it contributed Rs27,000 crore making a grand total of Rs3,00,000 crore. This has seriously impaired the ONGC’s ability to fund investment in exploration and production. There could not be a more glaring example of a PSU being used as a ‘milch cow’.
On its part, the NDA Government does not need to ride piggyback on upstream PSUs as under-recoveries — having already fallen from Rs1,39,000 crore in 2013-14 to Rs73,000 crore in 2014-15 — are set to decline even more during 2015-16 and beyond with full impact of diesel de-control plus steps under way to trim freebies on LPG and kerosene. It will be win-win for both the Government and the ONGC.
Between October 2003 and March 2008, the ONGC obliged, but thereafter, under directions from the Union Government, it started paying royalty on price net of discount. The State Government filed an appeal against this in Gujarat High Court which allowed its demand even on the discount. As a result, the ONGC is saddled with a huge liability of Rs10,000 crore for the period 2008-2013.
In tune with his reform credential, Mr Modi must put a stop to the untenable practice of asking ONGC/OIL to give discounts on their crude sale to downstream PSUs forthwith. It should also pursue the royalty case in the Supreme Court so that the ONGC is spared the totally unjustified liability it has had to bear.