The Rs 16,653 cr lie at heart of govt's diesel price justification

A small lie is at the heart of the government’s public justification for the recent hike in the prices of diesel and the decision to restrict subsidised cooking gas (LPG) supplies to six per family per year.

In advertisements released to the print media today, the ministry of petroleum and natural gas says the government collected Rs 83,700 crore in taxes on petroleum products and paid out Rs 1,38,500 crore as subsidy compensation to oil marketing companies (OMCs) such as Indian Oil, Hindustan Petroleum, and Bharat Petroleum.

Since the burden of the opposition criticism is that taxes could have been lowered to reduce the impact of the price hikes, the ad has this tearful reality to present: “The government of India was, therefore, a net loser by Rs 54,800 crore.” This figure is arrived by subtracting the duties collected from the subsidies paid (Rs 1,38,500 crore - Rs 83,700 crore = Rs 54,800 crore).

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The lie at the heart of this statement is this: the government did not actually send any cheque for Rs 1,38,500 crore to the OMCs to compensate them for their “under-recoveries”.

What actually happened was that it paid Rs 83,500 crore and asked the upstream oil and gas producers - Oil and Natural Gas Corporation, Oil India Ltd and gas marketing company GAIL - to pick up the balance losses of around Rs 55,000 crore.

The government robbed Peter to pay Paul.

The break-up of subsidy payments went something like this: ONGC paid the OMCs around Rs 44,500 crore, GAIL Rs 3,200 crore and Oil India around Rs 7,400 crore approximately.

If you are a purist, you might argue that since ONGC, GAIL and Oil India are government companies, there is nothing wrong in including their share of the subsidy burden in the government’s total.

But if you are really a stickler for accuracy, let’s be clear: all three are listed companies and not owned fully by the government of India.

ONGC has private (i.e. non-government) shareholdings of 30.77 percent, GAIL has 42.66 percent and Oil India, now due for further disinvestment, of 21.57 percent.

If we were to apportion the subsidies paid in proportion to their private shareholdings, you will find that non-government private institutions and retail investors bailed out the government to the tune of Rs 16,653 crore.

The small lie is thus a big lie - of the amount it said it paid as subsidies (Rs 1,38,500 crore) , Rs 16,653 crore is a false claim, even assuming you grant government the right to rob the ONGCs of the world.

It is also worth pointing out another number: the duties collected are almost equal to the subsidies directly paid by the government (Rs 83,700 crore versus Rs 83,500 crore). In short, in 2011-12, the government did not pay one paisa in net subsidies out of its own pocket to the OMCs.

Instead, it arm-twisted the upstream oil companies to pay its bills and thus ruined their profitability - including minority shareholders - in what can only be called an appalling breach of corporate governance standards.

This does not mean the oil price hike was not justified. At Firstpost, we have always argued that oil subsidies are simply unaffordable, and there is anyway no case for endlessly underpricing fossil fuels and encouraging their misuse (purchase of diesel cars, use of fuel-inefficient trucks and buses) to add to global warming.

Pricing fossil fuels on the basis of true costs, levying a carbon tax on them, and encouraging renewable sources of energy are the way to go.

Thus, while the government is justified in raising fuel prices, it has damaged its own credibility with citizens by starting the process with a little lie that has turned out to be not so little: Rs 16,653 crore lie.