At the current juncture, when the economy is battling the consequences of the steep increase in the international price of crude [India depends on imports for over 80% of its oil requirements] and there is an urgent need to mitigate the adverse effects, logically the focus has to shift to explore all potential areas for cost reduction. An important area relates to enticing private sector in marketing of petroleum products which today is the monopoly of public sector undertakings [PSUs].
The infrastructure for storage, handling, import terminals, transportation, marketing and distribution of petrol, diesel, LPG, kerosene etc is dominated by oil PSUs viz. Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL]. Out of 63,498 petrol pumps in the country, 27,325 are with IOCL, 14,565 with BPCL and 15,255 with HPCL.
In the private sector, Reliance Industries Limited [RIL], which operates the world’s largest oil refining complex has less than 1,400 outlets. Nayara Energy [formerly Essar Oil] has 4,833 while Royal Dutch Shell operates just 114 pumps. A couple of years back, British Petroleum [BP] plc of UK had secured a licence to set up 3,500 pumps but hasn’t yet opened one. Recently, French energy giant Total – in a joint venture with Adani Group – announced plans to set up 1,500 pumps in the next 10 years.
The oil PSUs fix retail prices by adding their marketing margin, dealers’ commission and taxes and duties to refinery- gate prices [RGP]. RGP is taken as import parity price [IPP] and export parity price [EPP] in the ratio of 80:20. Since, import of petrol and diesel attract higher customs duty @ 2.5% against ‘nil’ on import of crude, PSUs get a fortuitous gain in pricing. The gain is boosted by freight, insurance and port charges which are included in the IPP but in reality, not incurred as petrol/diesel is not imported.
Furthermore, since customs duty is an ‘ad valorem’ rate or a percentage of the basic value [unlike a specific duty which would remain fixed irrespective of basic price], in a scenario of increase in the import price in dollar terms and rupee depreciation, the oil PSUs add to their windfall. This would largely explain the steep increase in the profit after tax [PAT] of IOCL from Rs 22,426 crore in 2015-16 to Rs 33,612 crore in 2017-18. Ditto for HPCL/BPCL.
With over 90% of retail outlets and an overwhelming share of other infrastructure under their ownership/control, oil PSUs enjoy monopoly and are under no compulsion to reduce price.
There have been demands for liberalizing extant norms for granting authorization for marketing of petrol, diesel and aviation turbine fuel [ATF] with a view getting more private players into fuel retailing so as to increase competition, improve services and give customer more choices. Dharmendra Pradhan, union minister, ministry of petroleum and natural gas [MPNG], has responded favorably on several occasions in the past. However, it is only now that the government has made some serious moves.
The MPNG has set up an expert committee under Dr Kirit Parikh to “look at various issues related to implementation of existing guidelines for grant of marketing authorization of market fuels – petrol, diesel and ATF, identity entry barriers, if any, for expansion of retail outlets for private marketing companies and recommend easing of fuel retailing licensing rules ”.
At present, to obtain a fuel retailing licence in India, a company needs to invest Rs 2,000 crore in hydrocarbon exploration and production, refining, pipelines or liquefied natural gas [LNG] terminal. The bar is a bit too high. The committee may relax this and reduce the number of permissions required to entice participation of a large number of players in oil retailing.
However, the committee also needs to take a look at the extant policy of routing subsidy through oil PSUs only which is another major deterrent. The fact that even big players viz. RIL/BP [they face no resource constraint] have miniscule presence in oil retailing has a lot to do with this policy.
Until 2010, subsidization covered all major products viz., petrol, diesel, LPG and kerosene. The government directed oil PSUs to sell these products at prices below their cost of import/refining and distribution and reimbursed them for resultant loss. However, in June, 2010/ November, 2014, petrol/diesel were deregulated and subsidy withdrawn. From January 2015, it switched over to direct benefit transfer [DBT] of LPG subsidy.
The routing of subsidy only through PSUs puts companies in private sector to a serious disadvantage. This is because without subsidy, it is impossible for the latter to match the price offered by the former [albeit with subsidy support]. Although, withdrawal of subsidy on petrol/diesel has removed discrimination with respect to their sales, continued subsidization of LPG and kerosene – vide oil PSUs – will remain a major deterrent.
Even in respect of petrol/diesel, control on the retail price [the government often gives oral instructions – especially near election time – to PSUs not to increase the price despite hike in IPP or even decrease as happened recently] can be detrimental to the interest of the private companies.
The committee should consider recommending transfer of subsidy on LPG/kerosene by the government directly to the account of the beneficiary instead of the extant practice of routing through oil PSUs [they should operate like any other commercial entity at par with private entities]. The beneficiary should have the freedom to buy LPG/kerosene from any outlet of its choice.
In case of petrol and diesel, the government should refrain from interfering in the functioning of the oil PSUs viz. IOCL/BPCL/HPCL who should have full autonomy in taking decisions on pricing and other policy matters.
The above reform measures along with relaxation in entry norms for oil retailing will encourage private companies [including MNCs] to come in, promote competition and bring relief to consumers by way of lower prices, more choices, better quality products and improvement in the services.
Modi should use oil crisis as an opportunity to kick-start reforms in retailing of petroleum products.