Stock markets will probably welcome the finance ministry’s proposal to move to export parity calculations of petroleum sector under-recoveries since this will both lower the number-plate amount by a tenth, and also reduce the amount that ONGC has to bear. While ONGC has been paying around 40% of the under-recovery amount, the government’s subsidy outgo will also fall. Beyond this, however, the move does little to tackle the real issue of ballooning subsidies and makes life tougher for the PSU oil marketing companies (OMCs) like IOC, HPCL and BPCL who, at various points in time in the last few years, have been so cash-strapped, they’ve been close to running out of cash to buy crude oil to process into petrol, diesel and the like. Indeed, lowering the amount of subsidy the OMCs will get may even hit their production.
Right now, the government calculates under-recoveries on the basis of a weighted average of the price at which petroleum products are sold overseas (this is called import-parity pricing) and of the price at which firms like Reliance export their products (this is called export-parity pricing)—80% of the import-parity price and 20% of the export-parity price is taken to give what is called a trade-parity price. Since the import-parity price for, say, diesel, includes an element of freight and customs duties while there are no actual imports, the conventional view is that this overstates the under-recoveries. It does, but given India imports crude oil for refining, the degree of overstating the under-recoveries through import-parity pricing is not as great as it is made out to be.
In any case, the larger issue is a different one since reducing under-recoveries by a tenth through an accounting procedure still leaves around R1,38,000 crore of under-recoveries in FY13. Even if the under-recovery on diesel through the new accounting falls to R7.3 a litre from R9 right now, the gap between diesel and petrol pricing is so large it has ensured diesel sales growth far outstripped sales growth of petrol in FY12. The fact that sales of furnace oil have been contracting for several years suggests firms are burning diesel instead of furnace oil which would be cheaper had it not been for the diesel subsidy. That’s the real issue that needs tackling.