In his last act, Chidu fleeces oil companies even more to maintain his fiscal fiction

The UPA government’s parting kick to public sector misgovernance has been a solid one. True to form, faced with a rising fiscal deficit in his last year in office, Finance Minister P Chidambaram - as we noted before - had opted for accounting legerdemain instead of genuine expenditure reform.

With just a few days to go before the Modi administration takes over on 26 May, the outgoing government of Manmohan Singh has ordered the transfer of a larger chunk of profits from the oil and gas producers to loss-making oil marketing companies. This is corporate misgovernance at its worst.

In 2012-13, ONGC, Oil India and Gail (Gas Authority of India Ltd) were asked to cough up nearly 39-40 percent of the total losses of Rs 1,61,029 crore of the marketing companies - Indian Oil, BPCL and HPCL - on subsidised products like diesel, LPG and kerosene. For 2013-14, the finance ministry has arbitrarily jacked up the subsidy share of the oil and gas producers to nearly half so that the losers can show profits on their books at the close of the year.

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According to a Reuters report yesterday (23 May), ONGC, OIL and Gail will jointly cover about 48 percent of the Rs 1,39,869 crore under-recoveries (i.e. losses) in the year ended 31 March. The government has agreed to pay only Rs 70,272 crore of this amount, leaving the oil and gas companies to pick up the rest of the bill. Over the last few years of the UPA, thus, the share of subsidies shouldered by the oil and gas producers has steadily gone up from 33 percent to 38 percent and now 48 percent.

What this means it that ONGC, Oil India and Gail will, between then, transfer nearly Rs 70,000 crore of their revenues to Indian Oil, HPCL and BPCL - which is a massive dose of cross-subsidisation when the cost should really be that of the government.

Put another way, this means that Chidambaram’s 2013-14 fiscal deficit - put at Rs 5,24,539 crore in his interim budget, constituting 4.6 percent of the estimated GDP of Rs 11,320,463 crore - is complete nonsense. If you add the Rs 70,000 crore subsidy that is being paid by the oil and gas producers, the real deficit will be around Rs 5,94,539 crore, which will be closer to 5.3 percent of the estimated GDP for 2013-14. And we are not even talking about the subsidy bills deferred and left unpaid on other fronts like food and fertiliser.

The government’s unilateral decision to hike the subsidy burden of the oil and gas producers clearly proves two things: one, the fiscal deficit is a figment of the UPA’s imagination; and two, the transfer of higher and higher amounts of money from one public sector unit to another continues unabated just to make the fiscal deficit number look better. This amounts to defrauding the investors of these companies. Remember, neither ONGC, nor Gail nor Oil India is 100 percent government-owned. They are all listed companies and subject to at least basic rules of corporate governance.

The challenges before the Modi government are thus clear.

First, it must stop the loot of one public sector company - especially crucial oil producing ones like ONGC - to help the government hide its huge deficits.

Second, it needs to reduce subsidies and get back to market-based pricing by deregulating fuel prices - or opting for fixed subsidies that will, over time, shrink the size of the subsidy bill as a share of GDP over time.

Third, it has to empower the boards of public sector companies so that they are more responsive to shareholders. Modi has expressed his preference for turning around public sector companies rather than selling them off. This is not a great idea, but even if it is accepted as a given, the least Modi can do is ensure that public sector boards take decisions in the shareholders’ interests and not the government of the day. Turning around public sector units calls for board autonomy, and professional competence.

Modi has to ensure that the bad practices inflicted on the public sector by Chidambaram are ended once and for all.