S Gangadharan

With crude prices touching new peaks almost daily — they had reached a dizzy level of $126 per barrel on May 9 while the Indian crude basket ruled as high as $118 — the predicament of oil marketing companies (OMCs) is dire indeed.

Status quo in pricing and in the sharing formula would mean a severe impact on their balance sheets this fiscal, a setback in investment and even starvation of funds for their working capital requirements.

One figure tells all. Their under-recoveries stood at a staggering Rs 77,303 crore during 2007-08, sharply up from the preceding year’s Rs 49,387 crore; if no price revision — and a substantial one at that — takes place soon, and if high oil prices are here to stay — as all prognoses indicate — the loss in the sale of sensitive petroleum products at below the cost price may zoom to Rs 2 lakh crore during the current year; this is premised on the simple fact that under the present dispensation, OMCs are incurring a loss of Rs 500 crore collectively.

Clearly, the Centre must act, and act soon, to avert a situation of this sort from developing. So far, there are no signs of this happening.

During the last fiscal year, when the oil prices began to move stridently upwards — the monthly average price of the Indian basket rose from $65.48 per barrel in April 2007 to $99.76 in March 2008 with only an occasional drop during the intervening months, the government responded only when pushed to the corner, that is when the position became unsustainable for the OMCs.

And the measures were predictable — a feeble but belated hike in prices of petroleum products and a massive issue of oil bonds to the tune of Rs 20,054 crore.

The upstream producers and OMCs shared rest of the burden. Still, this left an uncovered gap that was borne by the OMCs. This approach may not be effective in the current context of a bull run in crude markets.

Under-recoveries are set to climb steeply unless there is a price revision, which is substantial; if the change is modest as the one that was effected in February last, then the situation will be back to square one as far as the OMCs are concerned. In the latter event, the burden borne by the upstream producers and the OMCs will be rather onerous.

Or, the government must increase the subsidy allocation. In the 2008-08 Budget, the petroleum subsidy was pegged at Rs 2,884 crore compared with Rs 2,882 crore in the preceding year.

If this is indicative of the Centre’s reluctance to fork our more sums towards petroleum subsidy, then it may be compelled to incur an off-budget liability by issuing more oil bonds.

But, the size of the oil bonds to be issued this fiscal will be much larger than what it was in 2007-08 as the crude prices are set to soar, while the pass-through effect of this is sought to be limited to the Indian consumer.

Though they do not figure in the budget explicitly, oil do entail a cost in the form of interest obligations. The Budget provision for interest on oil bonds is Rs 5,520 crore, which may turn out to be underestimate if the government prefers to tackle the oil crisis by recourse to this route.

Surging crude prices may have an impact beyond the OMCs and the fisc in that they may mean an enlargement of the merchandise trade deficit and the current account deficit.

In 2007-08, the trade gap had expanded to $80.4 billion from the previous year’s $59.3 billion.

Even if invisibles fare well in terms of net earnings, current account in the balance of payments promises to get worse in the ongoing fiscal year.

The economy, too, will take a hit in the form of a spurt in inflation in crude prices move relentlessly upwards and the government is compelled to jack up the prices of petroleum prices, even if marginally, to reduce the under-recoveries of OMCs. But, this rescue act, however justified, also means dearer fuel prices, the effect of which may be felt economywide. Inflation will bite more severely than at present.

Rising oil prices threaten to cast on ominous shadow on the Indian economy; the blow could have been softened if only we had pursued a policy of transmitting the trend abroad by suitable adjustment in the selling prices of petrogoods at home immediately and, considering the peculiar circumstances prevailing here, for the government to subsidise the sale price of sensistive items by making a provision in the Budget. Instead, the Centre wants to minimise the allocation in the Budget,while making the other two parties bear the burden inequitably.

Such half-measures never succeed in the long run and the painful task of tackling the bull by the horns faces the officialdom.

Source : DNA