Presenting his first maiden budget in July 2014, finance minister Arun Jaitely had accepted a daunting challenge of 4.1% fiscal deficit for 2014-15. On February 28, 2015, while presenting budget for 2015-16, Jaitely reported that the target had been achieved.
The achievement was at the cost of massive reduction in plan expenditure from budget estimate (BE) of Rs 575,000 crore to about Rs 468,000 crore as per revised estimate (RE), a fall of Rs 107,000 crore. For this, one can’t fault present government as it inherited a weak economy which resulted in equally massive drop in tax receipts from about Rs13,64,000 crore (BE) to Rs 1251,000 crores (RE), a fall of Rs 113,000 crores.
During the last 9 months of its tenure, the government has taken several steps to unclog jammed projects and revive investor sentiment. But, it would be naive to expect immediate results in terms of boost to growth and resultant tax buoyancy which normally start showing up only with a time lag.
However, one area where it missed a golden opportunity to mobilize resources relates to proceeds of disinvestment from sale its equity in public sector undertakings (PSUs). Against a target of about Rs 43,000 crores, it could garner only Rs 26,000 crores [most of it coming from 10% in divestment in Coal India Limited (CIL) to yield about Rs 22,000 crores]
The government had intended to garner an additional Rs 15,000 crores from divesting its residual stake in Hindustan Zinc Ltd and BALCO and some sale of SUUTI (Specified Undertaking of Unit Trust of India) holdings in Larsen & Toubro and Axis Bank. These were deferred due to legal issues in case of former and technical and procedural factors coming in way of latter.
But, a big disappointment was Oil and Natural Gas Corporation (ONGC) where it was originally gunning for realization of about Rs 18,000 crores from divestment of its 5% holding but eventually dropped the idea. The overriding reason for this was steep decline in market price of its share from Rs 472 in June, 2014 to Rs 320 currently and lukewarm investor’s perception.
Why has investors initial enthusiasm in ONGC fizzled out? It has a lot to do with the in-decision of Modi – dispensation on the contentious issue of ‘sharing the burden of under-recovery on sale of LPG and kerosene’ with upstream oil and gas majors viz., ONGC, OIL and GAIL. First, let us put a few facts in order.
For over 3 decades, due to control on prices of these products (on diesel till October, 2014) at levels below production cost, downstream PSUs, viz. IOC, BPCL and HPCL suffered under-recovery on their sale. Prior to 2003, these losses were cross-subsidised by surpluses from sale of naphtha, fuel oil, LSHS, aviation turbine fuel (ATF) to industries at prices much higher than cost.
These inflows and outflows were administered through the Oil Pool Account (OPA) which ran co-terminus with administered price regime (APR). Depending on international price of crude vs price of products, OPA ran in to surplus or deficit. Very often, surplus in OPA was transferred to Consolidated Fund of India (CFI) leading to stress in times of deficit as money won’t come back from CFI.
In 2002-03, then NDA government under Vajpayee dismantled the APR and wound up OPA. Even as it continued sale of diesel, kerosene and LPG at low prices, it decided to fund consequential under-recoveries directly from Union budget. This was also a precursor to a phased program for progressive elimination of subsidies in a time bound manner.
Unfortunately, the new government under UPA was never serious about reducing subsidies. Yet, it was keen on avoiding stress on the budget. Therefore, it came up with an ingenious idea of directing ONGC—besides Oil India Ltd (OIL) and GAIL —to offer discount on supply of crude to downstream oil PSUs from October 30, 2003, a policy which continues till date.
Till 2013-14, ONGC alone had cumulatively contributed a total of around Rs 273,000 crores towards under-recoveries of oil PSUs. During first half of 2014-15, it contributed Rs 27,000 crores taking grand total to Rs 300,000 crores. This has seriously impaired ONGC ability to fund investment in exploration and production. There could not be more glaring example of a PSU being used as a ‘milch cow’ to support government’s largesse.
In 2013-14, discount was fixed at US$ 56 per barrel. With oil price hovering around US$ 100 per barrel, surplus net of discount was barely sufficient to cover operational expenses. Now with oil plummeting to US$ 50 per barrel, it would be absurd to continue with discount of US$ 56 as apart from giving oil free, this would also require ONGC to pay US$ 6 to downstream PSUs.
There is a strong case for complete withdrawal of discount. At production cost of around US$ 40 per barrel, internal accrual of US$ 10 per barrel (even without discount) will be too little to support its mammoth capital expenses (Rs 30,000 crores plus annually). Therefore, even when price of crude moves up, that much extra money should legitimately be available to ONGC.
On its part, government does not need to ride piggy back on upstream PSUs as under-recoveries – having already fallen from Rs 139,000 crores in 2013-14 to Rs 73,000 crores during 2014-15 – are set to decline even more during 2015-16 and beyond with full impact of diesel decontrol plus steps under way to trim freebies on LPG and kerosene. It will be win-win for both government and ONGC.
There were other side effects of this untenable arrangement. According to the Oil Field Act (OFA), ONGC is required to pay a royalty of 20% on the market value of the crude oil it extracts from oil blocks/fields to the state government. Because of discount, while ONGC was getting less, Gujarat government insisted on royalty payment on pre-discount price.
Between October 2003 and March 2008, ONGC obliged, but thereafter under directions from central government, it started paying royalty on price net of discount. The state filed an appeal against this in Gujarat High Court (GHC) which allowed its demand even on the discount. As result, ONGC is saddled with a huge liability of Rs 10,000 crores for the period 2008-2013!
In tune with his reform credential, Modi must put a stop to the untenable practice of asking ONGC/OIL to give discount on their crude sale to downstream PSUs forthwith. It should also pursue royalty case in Supreme Court so that ONGC is spared totally un-justified liability of Rs 10,000 crores.
These two steps will put the finances of ONGC on a robust and sustainable footing thereby rekindling the interest of investors and guaranteeing roaring success of the divestment program.