Jan 14, 2010, 02.12 PM IST | Source: CNBC-TV18

No case for petrol subsidy in India: MS Ramachandran

The government may finally act on deregulating oil prices. The Prime Minister is meeting the Petroleum Minister Murli Deora and the chiefs of oil PSUs to take stock of the financial health of these companies. Deora, CNBC-TV18 learns, is taking a proposal to hike petrol prices by Rs 2.50 to Rs 3 per litre.

MS Ramachandran, Former Chairman, IOC
The government may finally act on deregulating oil prices. The Prime Minister is meeting the Petroleum Minister Murli Deora and the chiefs of oil PSUs to take stock of the financial health of these companies. Deora, CNBC-TV18 learns, is taking a proposal to hike petrol prices by Rs 2.50 to Rs 3 per litre.

In an interview with CNBC-TV18, MS Ramachandran, Former Chairman, IOC, spoke on the issue and the Kirit Parikh Committee report.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: Deregulating oil prices seems to have found support from policy makers. In your view, how should deregulation be approached?

A: This is not the first time that we are talking about de-regulation. The first such attempt was made in November 1997 by a coalition government in which the Communist Party was a member. Thereafter we have looked at various things, in 2002 it was supposed to be a full deregulation and then many committees have been appointed. We had the Rangarajan Committee, Chaturvedi Committee and now Mr. Kirit Parikhs Committee. I only hope some action gets taken.

But how do you approach it? If you look at petrol, I dont know whether there is a sufficient justification for putting any price control on that. Once upon a time they were saying that the bulk of the petrol consumption is by the two wheelers.

But today the prices of all commodities have gone up. And for the oil prices, I dont find any particular reason that the population that can afford to pay, people who own two wheelers and who are the middle class and upper middle class people, why petrol should be subsidised because it puts an intolerable burden on the oil companies and then again back to the government by way of oil bonds et cetera, which in posterity is going to bear because it is not being included in the budget.

Q: What about diesel? What is stopping the government from hiking diesel prices?

A: The ostensible reason is that if you increase the diesel prices, the transportation rates go up and then that adds to inflation. I dont know what the weightage is but there is some truth perhaps in that. But the flipside of the coin is, once upon a time diesel was subsidised like this and Dr. Vijay Kelkar used to call it the dieselization of the Indian economy.

A lot of people used to use standby diesel generating sets instead of drawing power from the grid. So how to give subsidy only for the transportation sector is a challenge.

Q: Refiners are expected to post hefty losses in Q3; some peg it around Rs 20,000-21,000 crore. The government has made it clear that it wont issue oil bonds to offset these losses, but instead there may be cash compensation at the end of the fiscal. In your view, will refiners be able to manage the financial crunch if no action is taken?

A: Obviously they wont be able to do that because if they are selling products at price way below where they ought to be they will not be able to bear the losses, especially in diesel because in this country diesel constitutes almost 40% of the barrel, and the diesel subsidy is something that is enormous. The oil companies wont be able to bear that.

Q: Last year, we saw ONGC, GAIL and others pool in over Rs 30,000 crore as cross-subsidy to help refiners. Do you think some solution like that could be worked out? Or do you think we have reached a stage where a price hike is inevitable?

A: I think we have reached that stage long ago and deregulation should be there because unless you price the products for their intrinsic value, you distort the whole scheme of things and then people start using these products in an uneconomic way. That is not the right thing to do. So we have reached that stage long ago.

Cross subsidy from upstream companies like ONGC and GAIL is certainly a solution. But either they directly subsidise or cross subsidise or the government takes away that from ONGC and those companies which make probably higher profits by means of a higher dividend or a windfall tax or what have you, and then in turn pay cash compensation to the marketing companies.

But certainly I understand that this year the tax collections are going to be less than the budgeted levels. So the government will find it hard to cough up the money. And then some money has to perhaps come from the upstream companies. How much et cetera those details have to be worked out.

Q: The Kirit Parikh Committee Report talks about a windfall tax on oil producers if their produce fetches more than any price above 60 dollars. Do you think this is feasible?

A: Yes it is and it is already practiced in many other countries and as I mentioned the answer to the previous question. So under such circumstances where the government doesnt have enough revenue to absorb bonds or pay subsidies, I think a windfall tax is perhaps a feasible alternative.

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