This is reform?

BS OPINION

The government's populism should not be funded by the PSU oil firms, who have private shareholders.

But ONGC, which along with GAIL has to contribute around Rs 2,400 crore (in the ratio of their post-tax profits last year), will supply crude to fellow-PSU refineries at a discount of $ 2.35 per barrel, and the one million tonnes each of kerosene and LPG produced by it, is to be sold at a discount of 20 per cent in relation to import prices.

The PSU oil marketing firms, in turn, will sell this to people at subsidised prices, and according to the formula, will spend around Rs 4,800 crore themselves "" IOC will bear half the burden, and BPCL/HPCL will split the difference.

Since there is already a gap of around Rs 1,000 crore between what the oil PSUs will pay and the expected excess-subsidy for the year (which, the petroleum ministry hopes the finance ministry will bear), and since global oil prices can continue to rise, it is likely that formulae will keep evolving.

In theory, the PSU oil marketing firms are free to change prices of petrol and diesel in response to changing global prices, but it is well known that the ministry of petroleum is consulted before any change.

It should be noted that this subsidy, announced by the petroleum minister, Ram Naik, is over and above the Rs 8,000 crore that ONGC continues to sacrifice each year since the government does not allow it to sell natural gas at market prices.

And prices are kept frozen here because the government does not want to raise the downstream prices of subsidised fertiliser and below-cost electricity as well! So the total bill is approaching Rs 15,000 crore.

What's frustrating for the oil PSUs is that none of this applies to private firms who, unlike ONGC, are allowed to sell their gas at market prices, and also not share the burden of excess LPG and kerosene subsidies that are not government-funded.

Naturally then, PSU oil firms will be at a huge disadvantage vis-a-vis their private sector rivals when it comes to not just profitability, but also their ability to expand. That is the full meaning of Mr Naik's actions.

If the subsidies are unavoidable, a more equitable method might be to spread the burden of going slow on reforms across all participants, whether in the private or public sectors.

This has been done in telecom, for instance, through what is called the access deficit charge. The oil PSUs have private shareholders as well, so anything that affects their profitability is not something the government should be deciding unilaterally.

It is also interesting to speculate on what would happen if the Supreme Court decides to allow the privatisation of HPCL "" will its share of the subsidy burden (Rs 1,200 crore is the current estimate for the year) be passed on to the new owner, or will it just be taken up by the oil companies that continue to be controlled by the government?