If the government finally decides to accept the recommendations of the Kirit Parikh report on keeping petrol and diesel prices at market rates and limiting the subsidies on other products, the profits of the upstream oil companies — Oil and Natural Gas Corporation, Oil India and GAIL — will go up around a fifth (in the current year), while the government subsidy burden will be contained at around Rs 20,000 crore (Rs 19,780 crore if oil is at $70 a barrel and Rs 22,760 crore if it rises to $80).
In the first nine months of the current financial year, government subsidies were around Rs 21,000 crore, with oil at around $68.69 a barrel – the lower outgo for government, in turn, is related to the higher profits of ONGC/GAIL/OIL, as they will now pay higher taxes as well.
While profits for ONGC will rise 19 per cent, it will rise 18 per cent for OIL and 29 per cent for GAIL – under the Kirit Parikh recommendations, GAIL will not have to fund the subsidies at all. The exact amount, of course, will depend upon what global crude prices are. If you take the situation in 2008-09, when the upstream oil PSUs contributed Rs 33,029 crore, ONGC’s profits would have risen 68 per cent, OIL’s 45 per cent and Gail’s 42 per cent (see table).
No calculations have been done for the oil marketing companies such as Indian Oil Corporation, since they had not been bearing any part of the subsidy burden after 2007-08, as their profits have been quite precarious.
Take the case of ONGC, the biggest contributor to the subsidies, to understand how the Parikh recommendations work. The company paid Rs 28,225 crore as subsidy in 2008-09, by offering discounted prices on the 183 million barrels of crude it sold in that year. Under the Parikh recommendations, ONGC would have to pay the government $2 per barrel if it sells oil at $70; if prices rise beyond $70, it will pay an additional 20 per cent of the hike in prices; when prices rise to $80, an additional 40 per cent is to be paid … which means that, based on the $86 sticker price of ONGC crude in 2008-09, the company would have paid a subsidy of $9.7 per barrel, or a total of Rs 8,200 crore (as opposed to the Rs 28,225 crore it paid in that year).
Not all of this would go to ONGC’s bottom line, as the company would pay, on average, 45 per cent of this to the government by way of taxes and royalty. Its 2008-09 profits would rise from the actual of Rs 16,126 crore to a hypothetical post-Parikh Rs 27,140 crore. For the first nine months of the current year, when oil prices have been lower and the subsidy burden, too, ONGC’s subsidy bill would fall from Rs 6,500 crore to Rs 2,000 crore by the Parikh formula.
For OIL, the profits in the first nine months of the year would rise from Rs 2,179 crore to Rs 2,564 crore, post-Parikh, and from Rs 2,229 crore to Rs 2,881 crore for GAIL.
The Parikh committee recommended an incremental rate of taxes on higher crude oil price realisation from the nomination blocks of ONGC and OIL to keep the government’s subsidy share in the range of Rs 19,780-23,340 crore at various levels of crude prices.
It suggested market-linked prices for petrol and diesel. However, only a partial increase of Rs 6 a litre for kerosene and Rs 100 on every cylinder of LPG has been proposed. It has also proposed a reduction in kerosene sold through ration cards by 20 per cent.
This still leaves an underrecovery from these two products. With the implementation of an incremental tax rate for ONGC and OIL, the share of government subsidy towards kerosene and LPG can be contained at various price levels of crude. As mentioned earlier, the government share if crude remains at $70 a barrel will be Rs 19,780 crore; at $80 a barrel, it will be Rs 22,760 crore and so on.
Thus, implementation of the report would result in re-rating of all oil PSU stocks. That, in turn, would increase their market capitalisation quite substantially, and,if the government chooses to sell part of their stock, a sizeable capital surplus in the coming budget.
