Opaque subsidies

Govt control returns to the oil sector

The government needs to be more transparent about its relationship with the state-controlled oil companies. Of the three public-sector oil-marketing companies (OMCs), it did exit Hindustan Petroleum Corporation Ltd (HPCL), though in fact it still retains control through HPCL’s part ownership by Oil and Natural Gas Corporation. It has also in the past claimed to have deregulated petrol and diesel prices and removed the burden of indirect fuel subsidies on the exchequer. These were major reforms and positive steps forward. However, in effect the government has now reversed this momentum. Instead of maintaining and increasing its effort to keep the sector and user prices at arm’s length, it has set up a system by which it continues to control prices at the pump while concealing the subsidies involved.

This has been done through line items in the Union Budget that are supposedly budgetary support for the efforts of the three state-controlled OMCs towards climate goals. An amount of Rs 30,000 crore was set aside for this. A capital infusion into all three companies is therefore on the cards, and it has been reported that this might even involve the government once again taking a stake in HPCL. Regardless of the stated purpose of the capital infusion, it will in effect make up for accumulated under-recoveries in the three OMCs. These under-recoveries are major contributors to the OMCs’ accumulated losses. An additional sum was also set aside as subsidy for liquefied petroleum gas, but has reportedly not so far been received by the companies. Under-recoveries grew particularly because prices at the pump were not changed to reflect the altered pricing landscape globally for petroleum products that followed the Russian Federation’s invasion of Ukraine last year. As India approaches the election season, it may be too much to hope for free prices to return in the short run. The notion that prices have been freed of political interference has in any case been seriously questioned by the way the three state-owned companies moved in unison to maintain consumer prices at the pre-war level and take any losses that they might suffer as a consequence. The effect on minority shareholders clearly was not worth considering.

This is reminiscent of the period over a decade ago when the political urge to control fuel prices led to complex systems of hidden subsidies, which began to add up into a significant fiscal drag. Removing these problems and creating more transparent pricing took much political capital over successive governments. It is unfortunate if reforms undertaken with so much effort are being rolled back. They will not only have a negative effect on the future fiscal balance but also set back India’s green transition, which was supposed to be funded through investments made by the legacy oil companies. And, of course, it will once again convince voters that politicians are responsible for oil prices — causing a vicious cycle in which politicians will be forced to respond to their demands to reign in prices, further cementing electors’ disbelief in the free market. Transparent subsidies, independent of the price actually paid, are the only way out.