The government has a convoluted system of giving petroleum subsidies. The budget provides some amount of cash to the oil marketing companies (OMCs), showing this as the subsidy on petroleum. In addition, the oil producers give subsidy directly to the OMCs. There is also some opaque subsidy by the OMCs in the form of lost profits. The system is so convoluted that there is no transparency and the subsidy figures in the budget are under-reported and unreal.

Also since the OMCs and the oil producers are listed companies, the minority shareholders feel cheated by the big bully who takes away what is their due without any reference to them, throwing to the wind the corporate governance norms set for others and also hurting the tax payers by ensuring that these companies are valued much lower.

If we recast the figures of ONGC and look at an alternative model where ONGC can sell petroleum at market rates, disclose the full revenues, pay tax on the profits, and dividend out 90% of the extra profits, the government and the shareholders will be better off than they are today in a bad system.

Table 1 shows the profits as reported, and actual profits in case petroleum is sold at market rates. Table 2 shows the total receipt to the government in the form of taxes on profits, dividend taxes and dividends if petroleum is sold at market rates. The subsidy by ONGC is given for comparison. Table 3 shows the increase in market value on full sale and the government?s share of such extra value.

It is obvious that the government would be better off if it is more transparent and takes its due share along with others, rather than misusing its position as the dominant shareholder. The value of its holding would also be larger and the tax payer would be well protected. The gap in GoI receipts between the current system and what is suggested is very less. ONGC could also pay a quarterly dividend to make sure that GoI cash flows are not hurt. By this, there would be greater transparency and greater value for all.

Further the budget would also account for the oil subsidy more honestly with the full subsidy disclosed in the budget, the non-tax revenues in the form of dividend would be higher and corporate tax collection too would be higher.

The finance minister has made a promise to reduce subsidies as a percentage of GDP to 2% for fiscal 2012-13 and to 1.75% over the next three years, but first the full subsidy should be disclosed in the budget.

Table 4 gives the correct oil subsidy for the year as against the lesser figures given in the budget. The budget also would be more relevant with full disclosure rather than a document full of holes which Parliament dutifully passes each year without debate.

In the budget for fiscal 2012-13, the GoI has provided only for R43,580 crore as subsidy on the premise that they will maintain at this level. The first quarter is nearly over with no action on the GoI?s part and it is obvious, despite the reduction in oil prices, that once again this number is going to shoot up.

Transparency and full disclosure are the starting point of good governance and our government certainly does not follow this in its budget.

The author is chairman, Aarin Capital, Bangalore