OIL SUBSIDY - TOO MANY SLIPS AND FALLS
By SP Tulsian
For most of us, this entire mumbo-jumbo of oil subsidy, under recovery and the confusion over upstream and downstream companies leaves the head completely dazzled. But it is one number crunching we need to truly understand because all these numbers ultimately affects us directly.
Yesterday, the Finance Minister approved the subsidy compensation for oil marketing companies (OMCs) for Q4FY13 at Rs.45,000 crore. Earlier during the fiscal, cash subsidy of Rs.55,000 crore was given; this means that for FY13, the total subsidy doled out is to the tune of a jaw dropping Rs.100,000 crore or Rs.1 trillion. Upstream OMCs will share a subsidy burden to the tune of Rs.60,000 crore. In FY12, under recovery was to the tune of Rs. 138,541 crore of which 40% came in from the OMCs. Take a look at the table given below to get the exact picture of under recoveries.
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.
The under recovery as at 16th May 2013 was at :
Rs.3.73/litre for diesel
Rs.28.75/litre for kerosene
Rs.400.96/cylinder for LPG
And crude oil during this period , 1st May to 15th May was at $101.21 where rupee was taken at Rs.55.04/$
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.
Naturally, the upstream oil companies are also crying foul as this is affecting their financials too but it is happier than the OMCs who are having a harrowing time. Take a look at how these companies are performing financially, entirely dictated by the way in which subsidy burden swings.
After all this numerical mumbo jumbo, the bottomline is that fuel hike alone is not going to help cut down subsidy. This entire gambit of subsidy itself needs to be cut and the step in that direction is the proposed export parity pricing (EPP). OMCs are not in favour of this as it is expected to bleed them further; they have estimated a loss of Rs.18,000 crore for FY13 if implemented now. So there is now the oil and gas expert, Kirit Parekh looking into the best bet between EPP and Trade Parity Pricing (TPP). Mr.Parekh will take three months to submit the report which means, no EPP for at least 3 months.