Subsidies on LPG, kerosene need to be addressed

BS Corporate Bureau

Over 70 per cent of India's oil requirement is currently met by imports. The country has less than 1 per cent share in the world oil and gas production. The annual production stands at around 32 million tonne of crude oil and 80 mmscmd of natural gas.

However, the sector is an important contributor to the Central and state exchequer through royalty, cess, custom duty, excise and sales tax. The private sector accounts for less than 15 per cent in total oil & gas production.

Key issues:

The upstream industry in the country has witnessed stagnation in oil & gas production for the last few years.

For the national oil companies, existence of a floor price ensures limited downside risk and a ceiling price restricts gains on account of rising prices. The performance of companies other than the NOCs in the upstream oil & gas sector have on the other hand been severely affected by movements in international prices.

The enhancement of refining capacity has resulted in a surplus. As a result Indian companies have been forced to either reduce capacity utilisation or export products at a loss.

Further, the refining margins of Indian refiners have now been exposed to the low and volatile regional refining margins due to dismantling of the Administered Pricing Mechanism. Accordingly, profitability of Indian refiners has moved in line with changes in regional refining margins. The saving grace has been the duty protection being imposed for the refineries. Post March 2002, there may be a need for an independent regulator to ensure adequate product availability at reasonable prices.

Factors that can be addressed in the Budget:

Removal of cap on gross realisations and full linkage with international oil prices would enhance the earnings of the NOCs. Further, the government through fiscal sops can facilitate strategic initiatives being undertaken by the domestic companies for improving the oil & gas availability position in the country.

Policy measures related to taxation, foreign investments and industrial growth are like to be the prime dictators of a sustainable long-term economic growth. This in turn would have the desired effect on the demand for petro-products.

Based on the recommendations of the Nirmal Singh Committee, the government had announced a phased deregulation of the petroleum sector. As per this deregulation programme, the government has proposed to enhance the duty protection of Indian refiners. However, the government may not implement its earlier programme in totality because of revenue considerations.

As the government proposes to fully deregulate the sector by March 2002, two critical issues which need to be addressed are: 1) Mechanism of handling the oil pool deficit 2) Reduction of subsidy on LPG and SKO.

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