Even though the government has recently allowed state-owned oil marketing companies to marginally increase the prices of petrol and diesel, one doesn?t need to use rocket science to figure out that the hike is just not enough to help Indian Oil Corp, HPCL and BPCL to tide over their losses. These downstream companies have been selling petrol, diesel LPG and kerosene much below the actual price.
To keep voters happy, the government decided to limit the hike in a range of Re 1-Rs 2 a litre when Rs 9 for petrol and Rs 11 for diesel were actually required. Also, the prices of LPG and kerosene were left untouched. This was when kerosene needed to be increased to Rs 20 a litre and an LPG cylinder priced close to Rs 330.
At the same time, a partial relief package was promised to the oil companies. This included issuance of oil bonds of a higher quantum?56% against the existing 42.7% of the under-recoveries, along with granting SLR status to the bonds.
Although clarity still eludes these two aspects, it is expected that finance minister P Chidambaram will look into these issues and make some announcements in the coming Budget.
International oil prices have increased to record levels and are above $95 a barrel. Yet, the government is allowing only a one to two rupee hike in the petrol and diesel prices. While this obviously is a pro-voter move, which helps the ruling parties grain groundswell, the consumers are getting used to higher subsidies. But, this long-term mismatch between the domestic retail prices and international oil prices is clearly unsustainable.
In case of continued non-revision of retail prices, oil marketing companies (OMCs) will incur extensive losses. They have big plans for investment in refineries, green fuel projects, marketing terminals, depots, bottling plants, and oil exploration and production (both domestic and overseas). The projected capital expenditure for 2007-08 alone for all the three state-owned OMCs is Rs 15,729 crore. In the absence of an appropriate fuel price hike, the OMCs are finding it difficult to meet the massive requirement for funds for undertaking various projects.
Continued cash losses make PSU operations unviable, sapping the ability of the navratnas to generate internal resources for investments and to service consumers, including the vulnerable sections of society and far-flung areas. Eventually, we are moving to a situation where the consumers and the economy may be faced with a larger price shock and adjustment than warranted. Also, despite excellent physical performance, OMCs could also be denied navratna status due to financial constraints that emanate from government control on petroleum prices.
Currently, despite large under-recoveries, the OMCs have been able to report annual profits due to support from the government in the form of oil bonds, discounts from upstream PSUs and refineries, and from restructuring of central and state sales taxes. However, if external support in the form of oil bonds, discounts and sales of shares is excluded, the oil marketing companies would have reported losses.
Given the political compulsion to increase the consumer prices of sensitive petroleum products, the government has to look at further restructuring of taxes rather than issuing oil bonds year after year. The contribution to the exchequer has been steadily increasing both for the Centre and states.
The total contribution to the exchequer (central and state) by way of various duties and taxes on crude oil and petroleum products was Rs 1.04 crore in 2003-04, Rs 1.21 crore in 2004-05, Rs 1.36 crore in 2005-06 and Rs 1.56 crore in 2006-07. Even during the current year, revenue from petroleum products will increase further due to volume increases.
At present, the customs duty on crude oil is 5%. There is no duty on domestic LPG, PDS kerosene, fertiliser inputs like naphtha, LSHS and fuel oil besides naphtha used for petrochemicals. This has brought all these products under the regime of negative effective protection.
Customs duty on petrol and diesel is 7.5% and is in a range of 5-10% for other products. The average customs duty on products is about 5.72% offering a net protection of just 0.72%. The Rangarajan Committee had pointed out that there is a case for allowing some effective protection to domestic refineries. This was suggested because refining is a cyclic industry characterised by very volatile prices. Besides, adequate refining margins are necessary for encouraging investment and modernisation and for offsetting the burden of irrecoverable taxes such as octroi and sales tax on crude oil. It may be mentioned that PSU refineries alone carry the burden of taxes on crude oil and lowering customs duties on products without similar adjustment on crude could make them unviable. Therefore, with crude oil prices scaling unprecedented highs, there is a strong case for lowering customs duty across the board both for crude oil as well as petroleum products by 2.5%.
On the excise duty front, currently, the levy on petrol and diesel is a combination of ad-valorem and specific rates. The excise on petrol is 6% plus Rs 3.25 a litre. This is inclusive of the cess for road construction. Then there is an education cess of 3% on top of this.
On this issue, the Rangarajan Committee was of the view that ?imposing ad-valorem duties during a time of persistent price increase is debatable. Not only do ad-valorem levies exacerbate the burden on the consumer, but they also result in the government willy-nilly benefiting through higher tax yields, making it vulnerable to the criticism of ?profiting at the expense of consumers?. There is, therefore, a need for both softening and smoothening the impact on the consumers of international price variations and for the government sacrificing ?windfall gains? in revenue.?
It is a well-known fact that high excise duties are inconsistent in the current scheme where government, on the one hand, is providing compensation to OMCs and on the other, levying high excise on petrol (about Rs 15 a litre) and diesel (Rs 5 a litre). Against this backdrop, the government had earlier eliminated excise duties on both PDS kerosene and domestic LPG. There is now a case to lower taxes on petrol and diesel.
Although the finance ministry has been against any further cuts in duties and taxes, hopes are still pinned on the Budget that is expected to make some minor corrections on taxes and duties. On its part, the petroleum ministry has proposed a reduction in excise by Re 1 a litre on petrol and diesel. This could reduce the under-recoveries of the OMCs by Rs 1,380 crore on petrol and Rs 5,270 crore on diesel annually.
