How oil can learn from urea

Subsidies on urea have declined by 30% this year, underlining the need for more reforms in the oil sector

How badly has the recent rise in international prices of crude oil impacted the Union government’s finances? In the first seven months of 2017-18, the government’s subsidy bill on petroleum products has gone up by over 30 per cent. In April-October 2016, it was Rs 16,237 crore and in the same months of 2017, it is estimated at Rs 21,246 crore.

 

At this rate, the current year could well end with a total petroleum subsidy bill of about Rs 35,000 crore, substantially higher than the Budgeted subsidy provision of Rs 25,000 crore. Add to this the annualised revenue loss of Rs 26,000 crore it will incur following its decision to cut excise duty on petrol and diesel by Rs 2 a litre, you cannot be faulted for inferring that the Modi government has run out of its three-year long good luck with low oil prices.

 

What can the government do? The answer lies in the breakdown of the government’s subsidy expenditure numbers for the current year. Even as the subsidy bill for petroleum products has gone up by 30 per cent in the first seven months of the current year, the subsidy bill for urea has declined by about 30 per cent. Against Rs 39,123 crore spent on urea subsidies during April-October last year, the expenditure this year in the same period is only Rs 27,398 crore.

 

This significant reduction in the urea subsidy bill was possible largely due to the government’s focus on launching neem-coated urea with renewed energy to prevent its diversion and misuse. The promotion of soil health cards also helped. But most importantly, the use of improvised packages for urea led to an increase in prices. The new packages had less urea for the same price. You could call it reform by stealth. In the end, however, the government has achieved both its goals. It has succeeded in dissuading farmers from excessive use of urea, which is harmful for land fertility, and also in reducing the subsidy burden on its finances.

 

Remember that the government’s burden under the nutrient-based fertiliser subsidy scheme has gone up in this period by over 6 per cent. This is because the kind of effort shown in the supply of urea to farmers has been missing in the way the government has dealt with the nutrient-based fertiliser subsidy system. It is time, therefore, for the government to pay similar attention to fertilisers other than urea.

 

Similarly, the petroleum sector now needs the next phase of reforms. Raising retail prices of petrol, diesel and cooking gas in small doses has worked as a strategy. It is now time to push for increased competition and efficiency at the level of refining crude oil. The concept of using trade parity based prices for petroleum products has outlived its utility and relevance. Let there also be competition among refiners to buy crude oil at the best prices from the market and use their technological skills to process them more efficiently. This will encourage refiners to be more competitive and cut their costs to increase their margins. Simultaneously, the retailers should be encouraged to price their products at levels determined by their own considerations of costs and margins. The current practice of collective retail pricing of petroleum products with changes announced in unison should be abandoned. Allowing retailers to fix the prices on a daily basis has made a difference. It is now time to take this process higher to the next level.

 

The Modi government’s overall track record in reining in subsidies expenditure has been good so far, with the exception of food subsidies, which have risen from Rs 0.92 lakh crore in 2013-14, the last year of the Manmohan Singh government, to Rs 1.35 lakh crore in 2016-17. In spite of that, the Modi government brought down its total expenditure on subsidies on fertilisers, food and petroleum products from Rs 2.45 lakh crore in 2013-14 to Rs 2.32 lakh crore in 2016-17. Indeed, as a share of gross domestic product, the government’s subsidies bill declined from 2.18 per cent in 2013-14 to 1.52 per cent in 2016-17.

 

This trend would have reversed in the current year, but for the creditable performance in managing urea subsidies. If only more fundamental crude oil pricing reforms for refineries had been introduced this year, the government could have made some more gains on the subsidies front. You must fix the roof, when the sun shines. The sun may shine a little longer as oil prices have not yet gone through the roof. The government still has an opportunity to push ahead with the remaining oil sector reforms.