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Petroleum industry: Corruption prevails

The government is not allowing the oil companies to pass through the increasing cost of high crude oil prices.

india Updated: Aug 20, 2006 09:01 IST

It is well known that there is a lot of corruption in India's petroleum industry. What is not known is the quantum of money involved, as also how the country's political class is using this industry as a cash cow.

The government-owned oil companies are bleeding and the private companies find it difficult to survive. The government is not allowing the oil companies to pass through the increasing cost of high crude oil prices. There is no urgency on the part of the government or opposition parties to reform energy pricing policy.

What is the quantum of loss to the government as a result of irrational pricing of petroleum products and misused subsidies and why is such a critical issue like petroleum pricing reform not on the national agenda?

Let us begin with liquefied petroleum gas (LPG). Today the middle class consumers are enjoying a subsidy of about $3.25 (Rs.150) per cylinder. The market for LPG in the commercial and automobile sectors is rapidly growing because of the flexibility of LPG as a fuel. In these markets, LPG is able to command considerably higher prices. As a result, at least 30 per cent of LPG classified as domestic is diverted to commercial and automobile markets. This results in the government losing about $3.5 billion per year.

Despite selling LPG in differently sized cylinders and greater monitoring by officials, the government has not been able to stop the illegal practice of diverting domestic LPG to more lucrative markets. Instead of solving the basic problem of selling the same product at three different prices, there is a proposal to define another category of poor that will get the subsidised LPG.

The situation is different in the case of gasoline. For a market where there are more than 42 million two wheelers, 2.5 million three wheelers and eight million cars, the official consumption figure for gasoline is just 7.6 million tonnes based on data for 2004. This is a gross underestimation.

The actual consumption is much higher and it may be as high as 11.8 million tonnes or more. At least five per cent of reported naphtha consumption, 10 per cent of reported diesel consumption and 15 per cent of kerosene distributed through the public distribution system (PDS) may be diverted to adulterate petrol. This gives rise to the government losing at least $2.8 billion of revenues per year.

Naphtha is a precursor to petrol in that by reforming it, petrol is produced. It may not be possible to detect the adulteration of diesel and kerosene even if they are mixed to the extent of 10 per cent. To detect quality impairment we need costly instruments. Adulteration of petrol with these three components (there are others as well) will no doubt reduce its quality and give rise to environmental problem. But petrol pump owners stand to make enormous profit through such blending.

The reason for the adulteration of gasoline is the big price difference between naphtha, diesel and PDS kerosene. When PDS kerosene is sold as low as $0.20 per litre and gasoline at $1.20 per litre and pump owner is given a small margin of $0.014 per litre, temptation is just too much not to adulterate.

Even blending with diesel, though not as profitable as with kerosene, is still profitable since there is a difference of about $0.37 per litre between these two products. Though international price for diesel is higher than gasoline, it is not so in India where diesel is cheaper than gasoline. This is because of higher tax rate on gasoline than on diesel.

On one hand, diesel is diverted to blend it with gasoline. On the other hand lower-priced kerosene - both for PDS and unregulated - is diverted to blend with diesel. It is possible that even some naphtha may also be diverted to blend with diesel - since the after-tax cost of naphtha is less than that of diesel. This blending of kerosene with diesel results in the government losing at least $1.1 billion per year.

The reasons for blending kerosene with petrol and diesel are explained above. Since kerosene is highly subsidised to the extent of $0.26 per litre or $304 per tonne, the pump owners, besides saving on taxes, stand to gain from the subsidies intended for the poor. PDS shop-owners are also beneficiaries. The misuse of subsidy amounts to $1.30 billion per year.

When we add the total tax revenues lost to the government and the subsidies cornered by pump owners, PDS shop owners, rickshaw owners and LPG dealers, they amount to $8.7 billion per year. By any standard this is a staggering amount. This corruption pie is not just shared by dealers of petroleum; it goes into the pockets of bureaucrats and politicians. As a result there is no constituency to stop this siphoning of tax revenues.

The staggering loss because of the irrational pricing policies and misused subsidies is several times the loan and aid India receives from multilateral agencies. By instituting creative ways of helping those below the poverty line, it should be possible to bring down the difference in prices between petrol, diesel and kerosene.

By decreasing the tax on petrol and increasing the taxes on diesel and kerosene, the government can get the same amount of tax as before and also reduce the adulteration and corruption. By issuing stamps for kerosene supply, the poor can continue to be supplied at lower price. Such a scheme was successfully implemented in some districts of Karnataka few years ago. But thanks to the pressure by the political class, it was dropped.

Now the Planning Commission has suggested another innovative scheme of using smart card. In fact, one of the strategic recommendations of the recently completed study by the Planning Commission - titled Integrated Energy Study - was to rationalise the energy pricing.

In fact, by reducing tax rates the government may be able to even earn higher revenues by reducing adulteration. What is needed is a strong political will which we do not have today.