In the context of the Indian economy, the word ‘subsidy’ draws sharp and contrasting reactions from all quarters—whether for food, fertiliser or export. However, the most ill-famed and veiled is perhaps the fuel subsidy. Such that it is perceived to be one of the key reasons why the government’s proposed divestment in ONGC remains in limbo.
Out of last year’s under-recoveries of about $24 billion (R1.4 lakh crore), ONGC itself contributed about 40% of it—a staggering $9 bn (R56,000 crore). The estimate of under-recoveries this fiscal is to the tune of $13 bn (R78,000 crore). Such reduction in under-recoveries has been aided by the global drop in prices of crude oil as well as by the deregulation of diesel.
The matter is not just about the financial strain this puts on the public sector undertakings (PSUs). Ever since the introduction of the fuel subsidy mechanism, there has been immense lack of transparency and clarity in the method of determining how the subsidy burden is to be shared between the government and the upstream PSUs. Historically, the government sent out a quarterly subsidy bill to the PSUs, based on which discounts were given to the OMCs. This then moved to a subsidy capped at $56 per barrel, which continued even after global crude oil prices had plummeted to sub-$50 levels.
With fair reason, this has led to discontentment among minority shareholders and scepticism among potential investors. Planning for future exploration expenditure becomes a challenge, when the uncertainty of the subsidy burden looms large. ONGC and OIL’s effective returns are directly impacted by the losses calculated by OMCs and the proportion of such loss the government allocates to them.
Even the CAG, in its report tabled before Parliament in July 2014, called for a formal and transparent burden sharing mechanism among all stakeholders instead of the present ad hoc system of compensation of under-recoveries.
Being listed companies with public interest, this subsidy transfer has also raised corporate governance issues in the past. The government has acknowledged this, with current oil minister stating that the subsidy formula issued will be relooked at, which would fetch a better price for ONGC in the proposed stake sale. The proposed revamped formula calls for graded subsidy sharing and this may be a welcome move from the perspective of the upstream PSUs. There is also a proposal to consider the cess paid on production of crude oil (currently R4,500 per tonne) as part of the subsidy to be shared. Thus, there seems to be a general push towards addressing stakeholder concerns on the subsidy sharing issue.
The upstream companies want the subsidy sharing mechanism to be transparent, fair and stable. And the government should rightly afford them this clarity. Of course, in the long run, complete deregulation must also be kept on the radar of policy makers, so that the issue of fuel subsidies can be packed away amid growing clamour that the amounts budgeted for subsidies be channelled towards more productive public spending.
By Raju Kumar
The author is partner-oil & gas practice, EY. Views are personal