5-8% Petrol, Diesel Price Hike Likely In Oil Reforms Package

Administered price mechanism to be dismantled ; crude imports to be decanalised by 99

The United Front government is preparing to unveil next week a raft of reform measures for the oil sector that could include a five-to-eight per cent increase in prices of petrol, diesel and kerosene with immediate effect, dismantling of the administered price mechanism (APM) by 1999-2000, total decanalisation of crude oil and petroleum product imports by 1998-99 and a phased reduction of the import duty on crude oil and petroleum products from 1998 onwards.

According to informed sources, the new package of measures might result in a price increase of Rs 2 per litre in respect of petrol and Rs 1.80 per litre for diesel. No estimate of the proposed kerosene price increase is as yet available.

 

The proposed measures are also likely to include the levy of a surcharge on the profits of all oil companies benefiting from the dismantling of the APM till the oil pool deficit is bridged, delicensing of the oil sector, decontrolling of petroleum products distribution in the domestic market and a novel share-swap arrangement among the Government of India, Indian Oil Corporation, Cochin Refineries Limited (CRL) and Madras Refineries Limited (MRL).

The objective of the entire exercise has been to reduce the extent of immediate increase in the price of petroleum products and reduce the oil pool deficit through innovative steps such as the share-swap arrangement and dismantling of APM.

The measures are now being discussed on the basis of a 90-page report of the Arjun Sengupta Committee, which examined a host of issues arising from the need to raise petroleum prices to check the rising oil pool deficit and to usher in the much-delayed reforms in the petroleum industry.The members of the Sengupta committee include finance secretary, Montek Singh Ahluwalia, revenue secretary N K Singh, chief economic advisor Shankar N. Acharya, and petroleum secretary Vijay L Kelkar.

The Sengupta committees recommendations were discussed and broadly endorsed at a high-level meeting of the United Front leaders in New Delhi last week. Participants at the meeting included Prime Minister Inder Kumar Gujral, finance minister P. Chidambaram, petroleum minister Janeshwar Mishra, defence minister Mulayam Singh Yadav, CPI-M leader Sitaram Yechuri, and CPI leader AB Bardhan.

The finalised measures were earlier proposed to be discussed at the UF steering committees meeting scheduled for June 27. This was to have been followed by a meeting of the Union cabinet to endorse the package and subsequent announcement either the same day or the following day. The schedule has now been changed as the UF steering committee meeting will be held on July 2. A Cabinet meeting has been scheduled immediately after that.

.According to the current thinking, the dismantling of the APM for the oil sector by the turn of the century will cover all existing public sector refineries and MRPL, the only joint sector refinery in the country with a present capacity of three million tonnes a year. The fresh six million tonnes capacity sanctioned recently for MRPL, therefore, will not qualify

for APM and the produce from the new capacity will have to compete in the open market.

There is also a proposal to levy a windfall tax on such oil companies that benefit from the dismantling of the APM. This will essentially be an oil deficit surcharge to be levied on their profits till such time as the oil pool deficit is completely eliminated. As on March 31, 1997, the oil pool deficit was estimated at Rs 15,500 crore.

The National Front government of VP Singh had also imposed a surcharge of 25 per cent to offset the impact of rising import bill following the Gulf war in 1991 and the widening oil pool deficit. The key difference is that while the National Front government had levied the surcharge on petroleum prices, the UF government plans to minimise the increase in prices and make up the shortfall by levying a surcharge on the oil companies profits.

The opportunity for levying such a surcharge has been provided by the accompanying decision to dismantle APM, which will boost the existing oil companies profitability substantially as they will no longer be tied down to the pre-determined profitability formula of 12 per cent post-tax return. Instead, they can take advantage of their lower historical costs and reap huge profits.

The discussion among the UF partners has also covered the proposal on decanalisation of all petroleum imports. This will mean removing the special privilege enjoyed by Indian Oil Corporation, which now is the sole canalising agency for crude oil imports. The proposal, which appears to have found favour, is to allow crude oil imports by all actual users, so that all refineries can freely import their raw material to process various petroleum products. At present, barring liquefied petroleum gas (LPG) and kerosene, almost all major petroleum products are canalised.

The proposal for a phased reduction in customs tariff on petroleum products has also been discussed. Chidambaram is understood to have opposed any immediate steep cut as his ministry is under pressure to mobilise more revenues in the current year. However, the finance minister has agreed to a phased reduction in the import duty on crude oil from 25 per cent to 5 per cent from 1998 onwards.

There is also a broad agreement on maintaining a 15 per cent effective rate of protection on imports of petroleum products. Thus, if the crude oil import duty is five per cent, the petroleum product import duty will be maintained at 20 per cent.

The finance minister has allayed apprehensions of any revenue shortfall as a result of the cut in import duty on the ground that crude oil import is due to go up from the present 35 million tonnes to 90 million tonnes once the new refineries go on stream in the next few years. Thus, the revenue shortfall as a result of the duty cut will be more than offset by the volume increase in crude oil imports.

The Sengupta Committee report has also suggested scrapping of all the various 100 per cent export-oriented refineries since none of them has really taken off. But foreign oil companies, which have already proposed joint ventures in India (like Aramco, Kuwait Oil Company and Oman Oil Company) have been insisting on opening up the domestic market for crude oil and petroleum products. The committee has endorsed the proposal, but there is a difference of opinion on this issue between the ministry of petroleum and natural gas and the industry ministry.

The petroleum ministry feels that an Indian company should have a minimum stake of 26 per cent in a joint venture in the oil sector. However, the industry is in favour of allowing 100 per cent foreign ownership of oil companies.

Another novel method being considered to reduce the oil pool deficit is to allow the Union government to divest its 50 per cent holding in MRL and CRL in favour of IOC.

This will mean IOC will pay up an estimated Rs 3,750 crore to the Union government to take over the two companies, whose merger with IOC is already under consideration. The government will use the proceeds from sale of MRL and CRL shares to reduce its outstanding dues to the Oil Co-ordination Committee (OCC) which, in turn, will use the same money to pay to IOC to bring down its balance receivables.

The entire exercise will represent innovative financial re-engineering resulting in the merger of MRL and CRL with IOC and reduction in the oil pool deficit by Rs 3,750 crore. for APM and the produce from the new capacity will have to compete in the open market. There is also a proposal to levy a windfall tax on such oil companies that benefit from the dismantling of the APM. This will essentially be an oil deficit surcharge to be levied on their profits till such time as the oil pool deficit is completely eliminated. As on March 31, 1997, the oil pool deficit was estimated at Rs 15,500 crore.

The National Front government of VP Singh had also imposed a surcharge of 25 per cent to offset the impact of rising import bill following the Gulf war in 1991 and the widening oil pool deficit. The key difference is that while the National Front government had levied the surcharge on petroleum prices, the UF government plans to minimise the increase in prices and make up the shortfall by levying a surcharge on the oil companies profits.

The opportunity for levying such a surcharge has been provided by the accompanying decision to dismantle APM, which will boost the existing oil companies profitability substantially as they will no longer be tied down to the pre-determined profitability formula of 12 per cent post-tax return. Instead, they can take advantage of their lower historical costs and reap huge profits.

The discussion among the UF partners has also covered the proposal on decanalisation of all petroleum imports. This will mean removing the special privilege enjoyed by Indian Oil Corporation, which now is the sole canalising agency for crude oil imports. The proposal, which appears to have found favour, is to allow crude oil imports by all actual users, so that all refineries can freely import their raw material to process various petroleum products. At present, barring liquefied petroleum gas (LPG) and kerosene, almost all major petroleum products are canalised.

The proposal for a phased reduction in customs tariff on petroleum products has also been discussed. Chidambaram is understood to have opposed any immediate steep cut as his ministry is under pressure to mobilise more revenues in the current year. However, the finance minister has agreed to a phased reduction in the import duty on crude oil from 25 per cent to 5 per cent from 1998 onwards.

There is also a broad agreement on maintaining a 15 per cent effective rate of protection on imports of petroleum products. Thus, if the crude oil import duty is five per cent, the petroleum product import duty will be maintained at 20 per cent.

The finance minister has allayed apprehensions of any revenue shortfall as a result of the cut in import duty on the ground that crude oil import is due to go up from the present 35 million tonnes to 90 million tonnes once the new refineries go on stream in the next few years. Thus, the revenue shortfall as a result of the duty cut will be more than offset by the volume increase in crude oil imports.

The Sengupta Committee report has also suggested scrapping of all the various 100 per cent export-oriented refineries since none of them has really taken off. But foreign oil companies, which have already proposed joint ventures in India (like Aramco, Kuwait Oil Company and Oman Oil Company) have been insisting on opening up the domestic market for crude oil and petroleum products. The committee has endorsed the proposal, but there is a difference of opinion on this issue between the ministry of petroleum and natural gas and the industry ministry.

The petroleum ministry feels that an Indian company should have a minimum stake of 26 per cent in a joint venture in the oil sector. However, the industry is in favour of allowing 100 per cent foreign ownership of oil companies.

Another novel method being considered to reduce the oil pool deficit is to allow the Union government to divest its 50 per cent holding in MRL and CRL in favour of IOC.

This will mean IOC will pay up an estimated Rs 3,750 crore to the Union government to take over the two companies, whose merger with IOC is already under consideration. The government will use the proceeds from sale of MRL and CRL shares to reduce its outstanding dues to the Oil Co-ordination Committee (OCC) which, in turn, will use the same money to pay to IOC to bring down its balance receivables.

The entire exercise will represent innovative financial re-engineering resulting in the merger of MRL and CRL with IOC and reduction in the oil pool deficit by Rs 3,750 crore.