Need a clear formula, not one aimed at ONGC sale
Given the government’s plan of big-ticket disinvestments in oil PSUs including ONGC to meet the highest ever divestment target of Rs 69,500 crore in FY16, its decision to bear the burden of the LPG subsidy is welcome. According to the new plan, the upstream oil firms—GAIL, Oil India and ONGC—will not share the LPG subsidy burden, though they will have to continue to contribute a part of the kerosene subsidy. What is not clear, however, is whether this is just a temporary decision aimed at bolstering the ONGC share price just ahead of the divestment—and made possible by the sharp collapse in global crude oil prices. Were crude oil prices to start rising again, will the government once again ask oil PSUs like ONGC to share the subsidy burden? If it is the latter, this will be nothing short of opportunism, and the government would do well to come out with a formal subsidy sharing roadmap.
The reason for the lack of roadmap, however, has to do with the government’s inability to bite the bullet on cutting subsidies. Which is why, while diesel was decontrolled due to the UPA’s decision to raise prices steadily, there has been little progress in cutting other subsidies—so once global crude prices rise, so will the subsidies. The LPG subsidy for FY16 has been estimated at R18,000 crore if the average crude oil price remains $60 per barrel—and R25,000 crore at $70 crude. While this is dramatically lower than the R46,000 crore in FY14, it is entirely dependent on crude prices. Ditto for kerosene where, as compared to R31,000 crore in FY14, the FY16 subsidy is projected to be anywhere between R13,000 crore and R16,500 crore depending upon whether crude stays at $60 or $70 per barrel.
Given the low global prices, it is still not clear why the government has not moved on chipping away at LPG subsidies in the way the UPA did with diesel prices—at current price levels, the subsidy can be done away with or cut substantially in a 12-18 months. Similarly, in the case of kerosene, there has been no attempt to link subsidy payouts to Aadhaar cards. If the situation in terms of pricing remains the way it is, and oil prices start rising, the subsidy bill will also go up since, given the tight budget constraint, the government cannot afford to pay the subsidy bill on its own. While the total subsidy incurred on the sale of diesel (till it became market-linked on October 19, 2014), PDS kerosene and subsidised domestic LPG in FY14 was R1,45,000 crore, the share borne by ONGC/GAIL/OIL was R67,000 crore—it was R32,000 crore in the first half of FY15. Investors buying into ONGC will probably keep in mind this fact that the subsidy-sharing formula, and the subsidy itself, has not been cast in stone.