Spare ONGC: Govt must not force oil firms to subsidise consumers

It has been reported that Petroleum Minister Dharmendra Pradhan hosted a meeting with the major upstream oil firms last week in order to determine how fuel prices might be kept low. This comes at a time when global crude oil prices have come off the lows that they had reached in previous years, and the cost to Indian consumers of fuel has skyrocketed in consequence. There is considerable political pressure on the government as a result of these higher prices at the pump, which are partly caused by fuel taxes. 

Mr Pradhan is considering solutions that involve possibly a windfall tax on producers such as Oil and Natural Gas Corporation (ONGC), or an enforced discount on the prices at which these producers sell their produce to oil marketing companies (OMCs) such as Indian Oil Corporation, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited. In the latter case, the government could set a ceiling on the price at which OMCs buy fuel from upstream producers, but companies like ONGC will argue for some form of compensation as a quid pro quo — perhaps a reduction in the dividend payout that they make to the government. In the last financial year, 2017-18, ONGC in particular handed out dividend payments worth Rs 84.7 billion; of that, Rs 57.4 billion went into the Union government’s coffers and helped combat the fiscal deficit.

Whatever the government’s political constraints, the petroleum minister’s approach is the wrong one. The decision to move towards decontrol and depoliticisation of fuel prices is an important one and must not be reversed. Fuel prices have too often been used as a political football, to the detriment of efforts towards fiscal restraint. Indian consumers must be allowed to accustom themselves to market forces affecting prices; hopefully that will also allow a more structured movement towards greater input for indigenous or renewable sources in the energy mix being used. Just because the methods by which a subsidy is being transferred to consumers are different from earlier does not mean that a price ceiling on wholesale fuel, for example, has different political or fiscal implications from directly administered prices at the pump. The government must recognise that, just as it benefited in previous years from low oil prices, it must now deal with higher prices using the same free-market principles it claimed to espouse earlier.

A naked display of control over state-owned firms such as ONGC would be a bad sign. Enforcing a price ceiling for political reasons signals a step back towards direct ministerial control of public sector undertakings (PSUs), which runs contrary to the government’s stated intent of making PSUs more independent and effective in their functioning. Already in the recent past enforced takeovers of HPCL and Gujarat State Petroleum Corporation assets reduced ONGC’s dividends by about 17 per cent. Even if the companies are compensated by a reduction in their dividend payout to the government specifically, it is not certain how far that compensation will go to make up any losses. In effect, the minority shareholders will suffer, indicating once again that the government is not just any shareholder, but a particularly interfering one. This could jeopardise future disinvestment plans, such as, for example, the continuing effort to privatise Air India.

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