Best for government to pay subsidy
It is not clear how much the government decision to bear all the subsidy on petroleum products has to do with the fact that subsidies have come down significantly with the fall in global crude oil prices, or whether these will be reversed in the future when crude oil prices start rising again, but the move is a sensible one. The fall in crude oil prices helped reduce petroleum sector under-recoveries from R163,800 crore in FY13 to a mere R27,600 crore in FY16—while oil PSUs had to bear a burden of R61,000 crore in FY13, this fell to around R2,300 crore in FY16. But it also helped a lot more since, with the government deciding to pass on just a fraction of the fall to retail consumers, it also mopped a significant amount by way of extra fuel duties.
Not all the fall in subsidies, though, is related to just the fall in global crude oil prices. Prime minister Narendra Modi’s Give-it-Up campaign was a stunning success with over 1.1 crore people agreeing to give up their subsidy due to this, and another 50 lakh chose not to link their bank accounts with their LPG subscriptions which was necessary in order for them to avail of subsidies. In addition, cleaning up duplicate LPG connections helped cull out over 3 crore users. The government also took a leaf out of the UPA’s book and decided to move to homeopathic increases in the issue price of both LPG and kerosene, the only two regulated fuels left once diesel was deregulated. Though the process has not been as public as the UPA’s decision—the upfront announcement by the UPA ensured reversing it was not easy—the government has allowed PSU oil marketing companies to make tiny increases in the prices of both kerosene and LPG every month; what is not clear is how long the process is to last. In the case of LPG, per unit subsidies had to be cut since, along with culling out the more affluent from the list of users—no subsidy is to be given to those earning more than R10 lakh per annum and this income cut-off could be further reduced—the government plans to give out 5 crore extra cylinders to the rural poor over the next few years. In the case of kerosene, the government is working with states to prune the list of users—petroleum minister Dharmendra Pradhan has told states that, with 50% of PDS kerosene being used to adulterate petrol/diesel, states are losing out on R3,500-4,000 crore of annual VAT revenues on these two fuels.
While it is always possible the government will go back to passing on the burden to oil PSUs once crude oil prices rise, there is a good reason not to. For one, the government as a whole has a combined balance sheet and, to the extent the PSUs are being asked to pay subsidies, there is that much less dividend, and taxes, that the government collects from them. At a time when PSU capex is critical to jumpstart the country’s stalled investment cycle, leaving them with less cash is also self-defeating. And, in even the short term, since the practice of oil PSUs paying subsidies has lowered their price-earnings ratios in comparison with private firms, this also means a significant loss in capital values for the government—at a time when the government is hoping to get money from divestment, footing the subsidy bill is a necessary strategy to boost the share prices of oil PSUs.