Rajya Sabha member Dipankar Mukherjee has been an active member of the Parliamentary Standing Committee attached to the Ministry of Petroleum and Natural Gas for the last five years. A qualified engineer from the Benares Hindu University, he is national secretary of the Centre of Indian Trade Unions (CITU). A Member of Parliament from the Communist Party of India (Marxist) for the past 11 years, he is widely regarded as one of the leading experts of the CPI(M) on issues relating to the petroleum industry. In this telephonic interview he gave V. Sridhar, he points to the serious anomalies in the tax structure, which allow the Union Finance Ministry to treat the industry as a "milch cow", at the expense of the public sector oil companies and consumers at large. Excerpts:
The government claims that it had no option but to raise the prices of petroleum products because of the rise in international crude prices. What are the grounds on which the Left parties have challenged the price hike?
The component relating to higher international crude prices is not even reflected in the recent price hike of petrol amounting to Rs.2.50 a litre. Reliable official data show that enhanced rates of excise duties account for Rs.2.20, while quality improvement accounts for the remaining Re.0.30. Diesel prices have been increased by Rs.2 a litre. The excise duty component of the increase amounts to Rs.1.06, while quality improvement accounts for Rs.0.24. The component relating to higher global oil prices amounts to Re.0.70 only. It is obvious that the recent hike was caused by the changes in excise duties on petroleum products announced in the last Union Budget.
[Union Finance Minister] P. Chidambaram said in his Budget speech: "The proposed changes are revenue neutral and I have been assured that there will be no increase in the retail price of the product as a result of the changes in duty structure." It is obvious that the recent price hike has gone against the assurance that the Finance Minister gave Parliament.
Apart from this, what are the grounds on which you have challenged the recent price hike? What other options did the government have?
The hike has been made to gather more resources in the form of taxes and duties. There were other options, which the government ignored. The Left parties have suggested the establishment of a price stabilisation fund, which would be funded by a cess of Rs.1,800 for every tonne on the oil-prospecting companies, notably ONGC [Oil and Natural Gas Commission] and Oil India Ltd. The cess was meant to be used for the development of the oil sector, but this never happened. If the funds had been used for the stabilisation of prices, the recent hike could have been avoided.
The Left has highlighted the need for the rationalisation of taxes on petroleum products. The government reduced the import duty on crude from 10 per cent to 5 per cent in the last Budget. It also reduced the import duties on LPG [liquefied petroleum gas] and kerosene to zero per cent, which were anomalous because the government subsidises them. However, the tax structure remains irrational.
The most important issue pertains to the fact that as fuel prices increase, the taxes collected by the government also increase proportionately. This proportionate increase in taxes places a heavy burden on the consumer. Plain common sense would suggest that the additional cess of 50 paise per litre for building roads and highways could have been avoided when prices have risen sharply. This places an additional burden on the oil companies.
What are the most important changes in the petroleum sector since the `partial' dismantling of the APM? How have they affected a) the oil-prospecting companies (ONGC primarily); b) the refining companies; c) the marketing companies; d) private companies such as Reliance; and e) consumers in general?
The most important change has been that petroleum product prices are now determined purely on a notional basis. Product prices are not actual prices based on the cost of production. They are being fixed on the basis of prevailing prices in the international market. Prices of products produced here are treated as if they are imported, after taking into account transportation charges, import duties and other costs associated with landing them in India. Profits or losses are then determined on this notional basis, whereas in actual fact petroleum products are produced in refineries in India. This is a major anomaly. One can understand the case for aligning Indian crude oil prices to international prices because 70 per cent of our requirement is imported. But there is no case for applying this method to oil refining, in which India is more than self-reliant (in fact, private companies such as Reliance export petroleum products).
Since the dismantling of the APM [Administered Pricing Mechanism], oil-prospecting companies such as the ONGC have benefited. Standalone refineries have also benefited. Under the APM, the ONGC enjoyed guaranteed returns after taking into account its production cost. Now, the price that it gets for its crude is linked to the global crude oil price and is not related to production costs, taxes or duties in India. The private oil-prospecting companies have also gained.
However, we are worried about the linking of Indian prices to global markets. The volatility in overseas markets can transmit to India, affecting the profitability of public entities such as the ONGC, when crude prices fall. The refining companies have benefited because refining margins have increased sharply. Margins are completely unrelated to actual refining costs. The marketing companies have lost out. A portion of the increased profits of the public sector companies from increased margins has gone towards balancing the losses arising out of the subsidies on LPG and kerosene distribution. The private company operating the biggest and most modern standalone refinery in the country - enjoying significant economies of scale - has benefited the most from the dismantling of the APM.
The average cost of refining is about 30-40 paise a litre, but the refining margin is about Rs.2.-2.30 a litre. The public sector oil companies had some advantage because of the higher margins, but this was neutralised to some extent by the subsidies that they had to bear.
The CPI(M) has been highlighting the fact that the whole point in promoting self-reliance is to establish entities in India to act as countervailing forces that would insulate the country from high prices in the global markets. If the current pricing system continues, even if India is completely self-reliant in crude oil and refined products, the consumer would still have to pay prices that are determined globally, even if the cost of production in India is lower. This is the biggest anomaly in the system that prevails, after the dismantling of the APM. In fact, this system is loaded against self-reliance.
You have argued in Parliament about the "opaque" nature of the pricing regime since decontrol. Can you explain this, particularly with reference to refiners' margins in the petroleum sector? How does this affect consumers, apart from skewing the balance between different kinds of players (refining companies, marketing companies and private players)?
Global prices depend on the global scenario. Mani Shankar Aiyar, the Union Minister for Petroleum and Natural Gas, has understood the anomalies in the system that we have pointed out. Why should product prices enjoy import parity in a situation of self-reliance? The refining margins float in alignment with global prices. A couple of months ago, when crude prices were about $46 a barrel, diesel prices were about $ 58 a barrel. The $12 margin arises out of the global oil companies' ability to manipulate markets. Compare this to the $2-3 margin that existed a couple of years ago. Now consider the Indian situation. Refining costs amount to about Re.0.40 a litre in a decent-size refinery in India; it would be lower in the bigger private-sector refineries.
The $12 margin a barrel translates into a margin of about Rs.2.50 a litre. The method followed results in margins increasing as global crude oil prices increase. The APM took into account costs associated with refining, taxes, plus a reasonable rate of return of 12 per cent. Today there is no cap on the refining margins. This explains Mani Shankar Aiyer's insistence that the refining companies should bear a portion of the cost arising out of the subsidies on LPG and kerosene.
You have also argued that the PSU oil companies do not enjoy a level playing field vis--vis private companies. What elements of the decontrolled regime have enabled this?
Standalone refineries have a tremendous advantage, whether in the private or the public sector. Private refineries also benefit when they get duty export. The duty drawback scheme enables them to make substantial profits. The situation results in a bonanza from all sides for the private companies. The duty drawback amounts to Rs.1,200 crores. Why should the companies enjoy concessions when profits, arising out of high global prices, are so buoyant?
Since 1974, as per the provisions of the Oil Industry Development Act, the ONGC and Oil India pay cess on the oil they extract. But private prospecting companies do not have to pay cess on the oil. The cess was earlier Rs.900 a tonne. This was increased to Rs.1,800 by the NDA [National Democratic Alliance] government. This works out to Rs.1.80 a litre, or $6 a barrel of crude. Private explorers do not have to bear the burden of the cess. Is this a level playing field?
Public sector refining companies also market their produce, incurring expenses on supplying products at subsidised prices. Moreover, whereas public sector oil companies have to sell all their produce in India, while having to pay the several taxes and duties that are applied on sales within the country, the private companies not only are free to export, but also enjoy concessions on such exports. Moreover, private players would enjoy higher margins because they do not have to incur marketing expenses within the country.
How real are the losses of the public sector oil companies? There has been some speculation that the Finance Ministry, rather than the Petroleum Ministry, was insistent on the price hike. Your comments.
In the last few years, the government reduced explicit subsidies on LPG and kerosene and transferred the burden to the public sector oil companies. The Finance Ministry should also share some portion of the burden instead of putting the burden on the oil companies and the consumers. It is not a matter of the two Ministers being at loggerheads. Successive Finance Ministers have treated the petroleum industry as a milch cow.
In the past, Petroleum Ministers considered favourably the recommendations of the Standing Committee of Parliament attached to their ministry. For instance, they agreed that the case for the abolition of the cess on crude oil was valid. But the Finance Ministry has not agreed to the proposal. Mani Shankar Aiyer understood the Left's contention on import parity in the case of petroleum products. But the Finance ministry insists on treating the petroleum sector as a source of increasing revenues. The Finance Ministry asked the committee on the rationalisation of the tax structure in the petroleum sector, headed by Ashok Lahiri, not only to rationalise the structure but also to ensure that its recommendations would be revenue neutral. That was itself contradictory. Rationalisation ought to have corrected the bias in the system which aligns Indian prices to global prices. The mandate to ensure revenue neutrality ensured that rationalisation would not be possible.
One of the biggest mistakes committed by the NDA government was that it did not rationalise the tax structure when it dismantled the APM. And, we were against the move to dismantle the APM. The wonderful balance sheets of the oil companies, particularly the private players, in the last few years is a result of the failure to rationalise the tax structure before the dismantling of the APM.
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