It is not clear what law minister Ravi Shankar Prasad had in mind when he said the government was looking at a ‘long-term’ solution to rising oil prices, but one solution hinted at by ratings agency Moody’s was that oil PSUs, like ONGC, may end up, as they did till a few years ago, bearing a large part of the unofficial oil subsidy by way of selling oil to refiners like IOC/HPCL/BPCL at a discount—between FY12 and FY15, ONGC’s discounts averaged Rs 47,000 crore a year. News agency PTI, on Thursday, speculated that ONGC may instead be asked to pay a ‘windfall tax’ once prices of oil rose beyond $70 a barrel. The money got from this would be used to keep consumer prices low; in effect, this is something quite similar to the earlier practice of discounts. It is not clear if the government will actually move in this direction, but if it is true, it will be quite unfortunate.
ONGC, and other oil PSUs, have traditionally been milch cows for the government, but while the NDA did away with the practice of discounts thanks to the crash in crude prices, it introduced new ways to milk ONGC. In March of last year, ONGC paid Rs 7,700 crore to buy gas fields of the Gujarat State Petroleum Corporation (GSPC), after critics panned Narendra Modi who, as Gujarat chief minister, had presided over GSPC’s expensive foray into the KG Basin, which did not result in any increased production—ONGC has not produced any gas from this field after its purchase either. And, this year in January, ONGC paid Rs 37,000 crore to buy the government’s 51% stake in HPCL on grounds that it would create greater synergies—whatever else, it ensured the government more than met its disinvestment target for the year. All this while, ONGC has paid taxes of around Rs 8,000 crore a year, and doubled its dividend payout to Rs 9,518 crore in FY17, over Rs 4,919 crore in FY16. In addition, ONGC pays annual cesses of around Rs 15,000 crore to the central government on its production. It is not quite clear how, on top of all this, ONGC has the ability to pay a ‘windfall tax’ or to give discounts on oil sales to fellow PSUs—part of this ‘windfall’ is, in any case, captured by corporate taxes.
And, surely any extra burden on ONGC will impact its ability to invest around Rs 30,000 crore every year in capex—if ONGC is not able to invest, its production will fall, while the government’s avowed policy is to lower import dependency. Indeed, if ONGC is to face an unofficial cap on its recoveries, the government has to ask why it will invest in taking out oil/gas beyond a point; indeed, some developments may even be put on hold for this reason. Indeed, as this newspaper has argued before, while the central government’s excise duty of Rs 19.48 per litre of petrol—and Rs 15.33 for diesel—remains unchanged as crude oil soared over the past few months, state government VAT rates are ad valorem and so offer greater scope for cuts. Maharashtra, for instance, earns around Rs 7.1 crore more per day from diesel/petrol sales as compared to the situation on January 1; the number is Rs 9.4 crore for Tamil Nadu. Given the number of states ruled by the BJP, it makes sense to ask them to cut VAT rates instead of imposing new cesses on ONGC. Since the cesses lower ONGC’s earnings, in any case, the loss in ONGC’s market-capitalisation will far outweigh the extra amount of ‘windfall tax’, or discounts, it is asked to pay. It is also not clear why the better off in the country should be subsidised by the poor—a tax cut leaves the government with less money to spend on the poor.