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Under-recoveries: real or pressure tactics?

business Updated: Aug 14, 2012 23:10 IST
Anupama Airy
Anupama Airy
Hindustan Times
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India’s three state-owned oil firms —Indian Oil Corp (IOC), Hindustan Petroleum Corp Ltd (HPCL) and Bharat Petroleum Corp Ltd (BPCL) — announced massive losses during the first quarter of this fiscal year citing high global crude oil prices, depreciation of the rupee against the dollar and lack of timely subsidy support from the government.

Are these losses for real or they are simply pressure tactics by the oil companies on the government to increase subsidy support and on the public at large to justify the inevitable hike in price of subsidised fuels — diesel, cooking gas or LPG and kerosene? http://www.hindustantimes.com/Images/Popup/2012/8/15-08-12-biz-03.jpg

What are under-recoveries of the oil firms?

Under-recoveries are the losses incurred by the state-owned oil companies — IOC, HPCL and BPCL in this case — for selling petroleum products (petrol, diesel, LPG and kerosene) at subsidised prices or below the cost price.

How do the oil firms incur these under-recoveries?

The oil companies import crude oil, which is the basic raw material for the refineries, by spending billions of dollars every year. As, due to the government control, these companies are unable to freely price the end products from the refineries including diesel, LPG and kerosene in general and petrol to some extent, they end up posting losses on the sale of these fuels in the domestic market.

How much loss was posted by these oil companies in the first quarter of 2012-13 citing under-recoveries burden?

While IOC — the country’s biggest oil refining and marketing firm — announced its highest ever loss of Rs 22,451 crore, HPCL and BPCL followed with quarterly losses of Rs 9,249 crore and Rs 8,837 crore respectively in 2012-13.

What are subsidies and who bears it? http://www.hindustantimes.com/Images/Popup/2012/8/15-08-12-biz-04.jpg

The oil companies are compensated by the government for their losses in the form of cash assistance or subsidy. Subsidies are paid out to compensate them for losses they incur on selling petro-products below cost price. In addition, the upstream oil companies like ONGC, OIL and GAIL, compensate the sister oil refining companies by way of discounts on sale of crude oil and gas. The final compensation or the bailout package comprises of these discounts besides release of funds by the finance ministry towards meeting the under-recoveries.

How much subsidy was released by the government and upstream oil companies to IOC, HPCL and BPCL?

The bailout package by the government every year — going out of taxes paid by the public — have actually been saving oil companies from posting losses in all these years. The government paid Rs 68,481 crore as subsidies to the three oil firms in 2011-12 and gave another Rs 38,500 crore later for the fourth quarter of 2011-12. Besides, another Rs 52,500 crore came as discounts from the upstream firms.

How much profit did the oil firms report in 2011-12 after receiving subsidy support?

Following a combined subsidy support of Rs 159,500 crore, the oil companies’ combined profit stood at Rs 6,177 crore in 2011-12.

Why are frequent hikes required in the price of the petroleum products?

The oil firms cite high crude prices and the rupee fall as main reasons for the increase in the domestic fuel prices. While the oil companies are free to adjust prices for petrol and diesel, LPG and kerosene prices are controlled by the government.

Why is the government reluctant to increase prices?

Political pressures and fear of the vote banks lead to such delays. Every time the diesel price has been increased, there have been public and political protests from within the ruling coalition partners as also the opposition parties. These pressures lead to delays in the policy reforms to adjust fuel prices periodically.

What are the taxes on petrol and diesel?

On every litre of petrol, the consumer pays anywhere between Rs 24 to Rs 27 per litre as taxes to the central and state government in the form of excise duty and sales tax respectively. Similarly, on every litre of diesel, the consumer pays around Rs 7 per litre as taxes.

What kind of revenues are collected every year by way of such taxes?

One in every six rupees (16%) of the Centre’s tax revenues came from levies on petroleum products last year. The centre and the state government collect huge taxes by way of central excise tax and sales tax or VAT. In 2011-12, the estimated tax collections by the centre and state together stood at Rs 2.5 lakh crore from the sector against Rs 2.3 lakh crore a year ago.

Why is the oil sector referred to as a milking cow?

While collections during 2011-12 from the oil sector by way of taxes stood at Rs 2.5 lakh crore, about a half of these revenues went back to the oil companies to help them offset potential losses.

How do under-recoveries affect oil firms?

All the three oil refining and marketing companies are listing entities and delay in timely release of subsidy leads to high level of borrowings as these firms have to make regular payments for the crude oil purchases. High debt affects the working capital and capital expenditure requirements of these firms besides lowering investors confidence.