Tuesday, March 2, 2010

INDIA's PETROLEUM SUBSIDY CONUNDRUM & the Kirit Parikh Committee Report

The Kirit Parikh Committee Report on subsidies in the Petroleum Retailing sector has made quite a few headlines in local news.
Link: http://petroleum.nic.in/reportprice.pdf

Recommendations include -

  • Free market pricing of Petrol and Diesel. The Kirit Parikh report suggests an additional levy of Rs. 80,000 on a diesel vehicle, citing that the higher excise must offset benefits vis-a-vis petrol vehicles. The report submits there is no need to subsidise users of diesel cars and SUVs, vehicles which are used for personal purposes.
  • Allowing periodic price increases for cooking gas (LPG) and Kerosene, based on performance of the agricultural sector and the rate of expansion of rural electrification. This will help rural India gradually adjust to the price hikes. Kerosene is used for lighting purposes in rural areas, so expanding rural electrification will reduce dependence on kerosene for lighting purposes
  • Excluding GAIL - the gas transmission behemoth from the under recovery subsidy burden.
All in all, the ever expanding petroleum sector subsidies are proving to be a real drain on the finances of the Indian government.
Oil subsidies are currently treated as an ''off balance sheet item''.
Implementation of these recommendations will thus present a ''truer'' picture of India's fiscal deficit.
To give you an idea of just how large the oil subsidy has been: -
From 2003-04 to 2008-09 total under recoveries amounted to Rs. 2,99,222 crores.

The market capitalization of India's largest private sector Giant - Reliance Industries is Rs. 3,23,235 crores!!!

The market capitalisation of the Benchmark BSE SENSEX index is Rs. 24,81,009 crores!

Question is : Does the Government have the political will to work past all the implementation issues and carry out these recommendations in the current inflationary environment?

Everyone knows that something need to be done.
The current pricing mechanism is just not sustainable with Crude Oil prices trading at $80!

Oil subsidies are the single biggest ''stimulus'' package that the government has provided to the economy.

But there is no free lunch!!

The balance sheets of government run oil sector companies are in bad shape.
The government too is struggling with 'oil bond' issues.

So can or will the government bite the bullet or continue to avoid tackling the issue head on, just as the Finance Minister chose to avoid discussing any specifics on implementing the Kirit Parikh report in the current Union Budget.

No comments: