After a three-year reprieve, state-run hydrocarbon explorers, especially ONGC, may again be asked to bear the brunt as a fiscally wary government is reluctant to take the hit of a costlier crude. While chances are that the government would revisit the practice of the upstream companies giving discounts on crude supplies to oil marketing companies to partly compensate for the latter’s under-recoveries on sale of petroleum products. PTI reported that the government may even seek a ‘windfall’ by telling ONGC to pay a tax, probably in the form of a cess that kicks in the moment oil prices cross $70 per barrel. FE could not confirm this independently.
The ONGC stock fell 4.5% on Thursday to close at Rs 167.65 on the BSE.
For ONGC, the government’s plan could turn out to be really onerous; the state-run explorer had forked out Rs 56,384 crore in FY14 to mitigate the subsidy burden on the fisc (it was freed from the obligation to give discounts to OMCs in June 2015 and so, its share of subsidy burden disappeared in FY17). Fellow state-run explorer Oil India and gas marketer GAIL (India) also used to share the oil subsidy burden with the government. ONGC, which has a mandate to up capex to increase India’s hydrocarbon output, also contributes in good measure to the exchequer by way of taxes and dividends: In FY17, the company paid a corporate income tax of Rs 7,316 crore and a dividend of Rs 9,518 crore, 68% of which went to the government.
Rating agency Moody’s in a note earlier this week had said that with the rise in crude oil prices, the risk that the government may ask state-owned explorers to share the burden looks imminent. “We expect the companies (ONGC and Oil India) could be asked to bear part of the fuel subsidy if oil prices stay above $60 per barrel for the fiscal year ending March 2019 (fiscal 2019), because of the government’s widening fiscal deficit,” said the note. While Brent crude was at $78.76 a barrel on Thursday during intra-day trade, the Indian crude basket was at $77.23 a barrel.
Moody’s Investors Service in a note on Tuesday expressed concerns that India’s fuel subsidy bill is set to increase with the risk of government urging the upstream companies such as ONGC and Oil India to share the burden, a practice discontinued in June 2015. At one point, these companies had borne as much as 40% of the country’s annual subsidy bill. However, the threat of an increase in the government’s subsidy expenditure is mitigated by the fact that the two key auto fuels would remain decontrolled and the LPG and kerosene subsidies are relatively small.
Indicating that an excise duty cut on petrol and diesel was not on the government’s immediate agenda, law minister Ravi Shankar Prasad said on Wednesday that the government was in the process of finding a “long-term, structured” solution to the issues arising out of the volatility of crude prices. “There is a compelling need to find such a (long-term) solution,” he said, adding that ad hoc measures weren’t actually desirable. The long-term solution may include resuming subsidy sharing with the upstream oil companies and bringing auto fuels under the goods and services tax (GST).
The other option is to reverse deregulation of prices. However, Moody’s believes that it is unlikely to happen. A government official also told FE that going back on reforms would be regressive. Petroleum minister Dharmendra Pradhan held a meeting with heads of state-owned oil explorers and oil marketing companies on Tuesday evening as the clamour against high fuel prices intensified.
Currently, around 47% of the retail petrol price and roughly 40% of retail diesel price are due to taxes. The central excise is now 25.4% of the retail price of petrol in Delhi while state’s VAT’s share is 21.3%.