The Comptroller and Auditor General of India, or the CAG, has presented a report to Parliament on the working of public-sector oil companies. There is a startling headline number - state-owned oil marketing companies, the CAG claimed, had benefited by Rs 26,600 crore through the administered pricing mechanism. In addition, the government's auditor said that the pricing rules had allowed private refiners - in particular, Reliance and Essar - to benefit vastly: they gained Rs 667 crore just on high-speed diesel in 2011-12.
The CAG's numbers and conclusions deserve further examination. True, the gains it reports are notional, but that itself should serve as a warning sign. Vast differences in estimates of the cost of refined oil reveals, essentially, a pricing system that is not sufficiently transparent. The build-up of the refining sector over the past decade has added to the confusion, as it means that there is always the chance that powerful private players are lobbying for pricing rules that give them supernormal profits. In this case, the claim is that private refineries sell refined petroleum to oil marketing companies, or the OMCs, at a price that is 80 per cent import price-linked and 20 per cent export price-linked. Export prices are lower than import prices, since import prices include Customs charges, among other things. But what the private refineries do not sell to OMCs, they export - at, naturally, 100 per cent export prices. The CAG's argument is that the negotiation between the OMCs and private refineries is a zero-sum game: either the private refineries benefit, in which case the OMCs lose, or vice versa. Could the private refineries not be charged a lower price, one which is more linked to their economic opportunity cost - exports of refined oil? If so, why have the OMCs - or their masters in the petroleum ministry who determine pricing policy - not done so? This is a valid question. There are also other questions as to whether state-run refiners or state-run OMCs have benefited and lost at the expense of each other. However, that these questions can even be asked demonstrates, once again, the problem with the pricing system. It certainly seems puzzling, for example, that a Customs duty applicable to refined petroleum products, such as petrol and diesel, is used to calculate the price at which stand-alone refineries sell them to oil marketing companies. India does not need to import diesel or petrol as domestic refineries produce adequate quantities of these products, and indeed more than half of petrol and more than a quarter of diesel produced in the country are exported. Yet Customs duty is used to calculate the price the OMCs must pay to the refineries for diesel and petrol!
This is not to argue that the global increase in the price of oil should not be passed on to Indian consumers. This is an essential reform, and the attempt by the government to slowly phase out "under-recoveries" of the OMCs, which eventually translate into fuel subsidies, is a worthy enterprise and must continue. However, a transparent estimation of the size of those under-recoveries is necessary.
