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.
BPCL stock price
On November 26, 2015, Bharat Petroleum Corporation closed at Rs 904.95, down Rs 2.05, or 0.23 percent. The 52-week high of the share was Rs 987.00 and the 52-week low was Rs 622.45.
The company's trailing 12-month (TTM) EPS was at Rs 94.02 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 9.63. The latest book value of the company is Rs 310.72 per share. At current value, the price-to-book value of the company is 2.91.
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