According to the former director of finance for BPCL SK Joshi, the best way for the government to manage its subsidies and the price of petrol is by giving over control to Parliament.
In an interview to CNBC-TV18, Joshi the government should do switch to the prior approval of Parliament for the subsidy before distributing. “This will end this open ended exposure on the oil price risk,” he explained.
Once the subsidies are approved, Joshi says the oil price should be floated and adjusted periodically. “I think this change will put lot of discipline in the market, which is very essential at this juncture when global markets have become so uncertain,” he said.
Joshi goes on to say that state governments should reduce fuel tax so as to reduce the impact of the petrol price hike on the consumers. The big petrol price hike of Rs 6.48 per litre shook up consumers because it has been the biggest quantum in the past ten years.
Below is an edited transcript of his interview with Sonia Shenoy and Ekta Batra. Also watch the accompanying video.
Q: There is expectation that state governments could rationalize fuel taxes; we’ve already saw Goa do that. Do you think that that would be a feasible measure at this point in time?
A: It is the state level which today has the ad valorem structure, where sales tax and entry tax are linked to the fuel prices. So every increase in fuel price also brings along with it higher incidence of tax. So there is definitely room as far as the states are concerned to reduce the taxes. I wish that the states also help in reducing the impact to the consumers.
Q: Everyone is now watching for what happens with respect to diesel and on that account we are hoping to see something at the EGoM meeting tomorrow. Do you think we could see something on the lines of a diesel deregulation or do you think we should just do with a diesel price hike at this point in time?
A: If you take diesel, it is Rs 13.50 while LPG cylinder is about Rs 480 and kerosene Rs 31. At one stroke, it will be difficult to bridge the gap. World over subsidies are given, there is no issue on the subsidy, but what if you are talking about structural change.
Today, the subsidiary exposure is open index exposure on the books of the oil companies. In my view, the government should do switch to the prior approval of Parliament for the subsidy before distributing, which will end this open ended exposure on the oil price risk. The exchange currency risk is also very unmanageable, and we are seeing the impact of mispricing energy also growing.
Like the government did two-three years back, they switched from oil bonds to cash subsidy. I think now government needs to think that they should approve the subsidy before in Parliament, they can establish the Parliament supremacy in distribution of subsidy, and that will bring some kind of a discipline on the subsidy.
Secondly, there should be proper targeting of subsidy. I think if these two issues are done, subsidy should not be an issue. But it should be approved before distributing and should not be left only when oil companies accumulate huge amounts as under recoveries.
Q: There is a lot of criticism with regards to the quantum of the price hike and the late reaction that the government has had. Going forward, do you think that we could see more staggered price hikes for petrol?
A: Government should not keep this decision on their head. If they pass it on to Parliament, it becomes all party decision. One simple rule should be that they do not entertain subsidy before Parliament approval and then automatically the consensus will happen if subsidies has to be given. So government should get away from the price fixing.
After granting the subsidy, price should be floated so that periodically these are adjusted. I think this change will be very vital and put lot of discipline in the market, which is very essential at this juncture when global markets have become so uncertain.
Q: Do you think the government is exercising some sort of indirect influence on the oil marketing companies and that may sort of restrict any kind of measures going ahead?
A: I am now away from the oil industry, but yes, it appears that oil companies need to go to government before sanctioning. If you see the recent media reports, oil companies are approaching the government to also include petrol if they are not allowed to adjust the prices and not adjusting periodically is a major problem.
Q: Post this 10% hike in petrol prices, how much do you think that OMCs are losing on petrol at this point in time because now there are talks that it could possibly even be rolled back at one point?
A: I think with this price increase, the under-recovery is done with. I think it is mark-to-market and this is my view. I don’t have numbers, but it seems that it is already mark-to-market and this is done at one stroke.
Q: If the meeting with the EGoM fructifies tomorrow, what quantum should one expect from the diesel price hike?
A: If the price is not passed on at least in some measure, the overall annual under recovery on diesel, LPG and kerosene will cross Rs 2 lakh crore. In FY12, the oil imports grew by 47% and this is unsustainable. Along with gold, it is sucking the dollars from the market.
If this kind of a rise is not passed on and then converted to either direct borrowing from the oil companies or borrowing through the government programme, it’s basically funding by borrowing which is very dangerous for the overall economy and the fiscal balance. So it is inevitable in my view.
Q: Realistically what should one expect, will it just be a token hike in diesel or do you think that there will be a hike like we saw today, ballpark what do you think one should expect?
A: A token hike will not address the issue. It should be at least in parts, it cannot be done at one go. I won’t hazard a number, but yes, it should be noticeable amount. It cannot be token amount and it is warranted by the current fiscal situation.