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Oil sector reform: missed opportunity

The NDA has failed to make use of the soft oil market. It should have taken bold steps to reduce oil sector subsidy and liberalise the oil and gas sector.

The NDA government missed a golden opportunity for  implementing the much desired oil sector reform. International oil markets are at a low level compared to the last four years. Removal of Iranian sanctions as a result of nuclear agreement is likely to increase world surplus production capacity and will have a dampening impact on the crude oil market. However, it is impossible to predict how long oil prices may remain low.

The world benchmark Brent, after staying above $100 per barrel during 2010-13, fell below $55/b in the first quarter of 2015. That was when NDA should have taken some hard decisions to reform the oil sector pricing. In Q2 crude price went above $65/b and since then has come down again as a result of continuing surplus production.

 

Much needed corrections...

It is to the credit of NDA that it totally liberalised diesel price from 18 October, 2014. As in the case of petrol (liberalised from June 2010), the public sector oil companies now have the freedom to charge to reflect international oil prices. As oil prices were falling, NDA boldly increased duties on petrol excise to mop up additional revenues. Let us hope that unlike UPA, if and when oil prices go up in the future, NDA will not be tempted to control petrol and diesel prices again to the detriment of the overall economy.

With great fanfare NDA announced scrapping of PDS kerosene in November 2014. It would have allowed

kerosene to be sold at market prices.  Poor will still be given subsidy in the form of cash using Aadhaar.  But for the opposition by Tamil Nadu, none of the states protested in any significant way. It is a mystery why the government backed down to take a historic step of liberalising kerosene, a commodity controlled since the Second World War.

Recently it took a regressive step by transferring the kerosene subsidy to public sector oil companies. The government will reimburse a maximum of Rs 12 per litre but it is willing to pay any amount of subsidy on cost incurred in the case of LPG.

 

LPG - still subsidising the rich...

It is in the distribution of residential LPG the NDA has completely failed to remove subsidy. Studies show that mostly the rich and middle class get a large share of LPG subsidy (86 per cent of the total subsidy of Rs. 52,246 crore in 2014-15). Even with lower oil prices, LPG subsidy burden on the government in 2015-16 is estimated to be Rs. 22,000 crore.   

Aware of this reality, the government had urged the well off to voluntarily give up the subsidy. Only 10 lakh out of 15.3 lakh customers have done so as of end of June 2015.  It is here a bold policy of dropping residential LPG subsidy would have helped divert the resources generated to other sectors like education, health, water supply....

In the case of gas sector also the NDA government’s reform was at best a baby step. The gas formula suggested by UPA was arbitrary, but it did reflect the Indian market reality of LNG imports to meet domestic demand. Criticising the UPA gas formula as generous, NDA fixed LNG prices on unrelated Canadian and Russian gas prices. It looks as though the goal was only to reduce the resultant gas price. Instead of allowing the market place to discover the price, the government continued to control the price without realising the damage done through poor exploration.

 

No goal for oil/gas self - sufficiency...

NDA also failed as a result of wrong gas pricing policy to promote shale oil and gas exploration as the USA and China did. They have benefited immensely from such a switch.

The Vijay Kelkar Committee report submitted in September 2014 made several recommendations to reduce oil and gas import dependency. If implemented in full, India’s oil and gas import dependency would be only 39  versus the 77 per cent under the business as usual scenario in 2030 and the current 62 per cent. Such a reduction would have been a stunning achievement. So far NDA has showed little interest in the report.

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