Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The myth behind oil under recoveries - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 9, 2012

    The myth behind oil under recoveries

    Petrol prices have been a matter of concern for common man since their deregulation in June 2010. Deregulation was an attempt to cut down the Government cash outflows on fuel subsidies. The prices have been hiked around 13 times since then, however, there is hardly a relief on the under recoveries front. While petrol prices were left unchanged this fortnight on account of approaching elections, one should not be surprised to see a steep hike once the imminent political pressure gets over.

    With Government contributing huge amounts to under recoveries and subsidies, it may seem a little unfair to blame the Government for hiking end product prices when crude is trading high. However, a little analysis of the economics shows that under recoveries could be a fancy concept exploited by the Government to justify high fuel product prices.

    While a common man perceives under recoveries as losses suffered by state run oil marketing companies, these losses are just 'notional 'and not actually incurred by the companies. This is because the Government uses import parity basis to calculate under recoveries. For example in case of diesel, the fixed selling price of the diesel is compared to the amount the companies would have paid had they imported the diesel (this will include international price of diesel, custom duties, transportation costs and marketing costs and margins). However, the price thus arrived has nothing to do with the actual cost of producing diesel which will be lesser (considering domestic over capacity in petroleum products refining markets). The way whole thing is projected makes one feel that the Government is making net losses in oil marketing business so as to keep the fuel prices affordable.

    However, as we have illustrated below, the net beneficiary from the oil marketing business is the Government itself.

    Sample this. Indian Oil Corporation (IOC), the largest player in oil refining and marketing space, paid excise duties to the extent of Rs 309 bn as compared to total Government grants/subsidies of Rs 243 bn towards fuel subsidies. The net effect of this was Government registering net inflows of Rs 66 bn from IOC. The whole hue and cry about subsidies and under recoveries looks ridiculous since this inflow is over and above the corporate tax rates paid by these Oil Marketing Companies.

    (Rs bn) IOC BPCL* HPCL** TOTAL
      FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11
    Government Grants/Subsidies 168 243 59 100 63 97 289 441
    Excise duties 261 309 99 124 80 97 440 530
    Net inflow for the Government/Outflow for OMC 93 66 41 23 17 0 150 89
    Company's Pre tax profits 150 101 28 28 24 26 202 156
    Duties as a % of pre tax profits (over and above the Corporate tax rate) 62% 65% 147% 82% 70% 1% 74% 57%

    *BPCL - Bharat Petroleum Corporation Ltd.; **HPCL - Hindustan Petroleum Corporation Ltd.;
    Source: Equitymaster, Company data

    To conclude, it's not under recoveries dragging down the viability of oil marketing business but the convoluted taxation and pricing policies formulated by the Government. If the Government rationalizes such taxes and even if it deregulates all the fuel products in a phased manner, chances are that increased competition from private sector will lead to oversupply and pricing war thus ensuring affordability of fuel products.



    Equitymaster requests your view! Post a comment on "The myth behind oil under recoveries". Click here!

    5 Responses to "The myth behind oil under recoveries"


    Mar 30, 2012

    Govt.May collect the tax for their project, But in Today's Scenario State government are not doing very big project all the projects are giving on BOT Basis and the additional Toll tax is recover from the people means that the people of India are paid Tax on Tax.My opinion is Tax structure must be unique there should not be double taxation policy.

    Like (3)


    Jan 21, 2012

    Tax collection from Petroleum product is easiest for center and state Govt. How much should be collected and how much is really get collected from other commodites and services is known and why it happens is also known. But govt is not able to improve tax collection from other sources that is why tax on petroleum product is rediculously high. Vat varies from 8% to 34%. Rather then crying for under recoveries govt to rationalise the tax. Incidently oil produes by ONGC ia at about 15 Dollar a baller as against about 90 Dollar a barrel international crude price.Difference is with Govt owned ONGC.

    Like (2)


    Jan 17, 2012

    Its interesting @raj bhansali that you believe that excise duty receipts from oil sector is significant contribution to the government.
    To be frank, I completely agree with you that government must get money from taxes to fund its projects and other expenses. If excise on petroleum products does the job, then so be it...completely agree with you there.
    However, the counter argument doesn't hold water...why should govt administer the prices of petrol products. Today, reliance, essar, shell have practically wound up their business precisely because even after ostensibly 'freeing' up the petrol prices, following things happen:
    1. Petroleum prices are changed by all state run corps in a co-ordinated manner
    2. These changes are also precisely for the same amount for a city, and don't differ from pump to pump within it
    3. If an increase is objected to by any strong political party, it may be rolled back
    4. With the low prices, it is guaranteed to hit the OMCs balance sheets, which, since they are mostly state owned, will meekly agree to it
    5. Private cos cannot take the hit since they are not doing social service, hence have to go out of business, thereby maintaining govt's monopoly in oil.

    Like (1)

    raj bhansali

    Jan 11, 2012

    To comment on your statement "The whole hue and cry about subsidies and under recoveries looks ridiculous since this inflow is over and above the corporate tax rates paid by these Oil Marketing Companies".

    Please check your basics, what is portion of total receipts from oil sector is as percentage of government receipts. it significant if it stops who will fund government projects. How will growth happen. Also look at contribution of duties on petroleum products as % of total indirect taxes it is 50% approx. can we cut it. This is the fuss with under-recoveries unless India increases petroleum prices in a significant manner. or direct tax ambit becomes biggers and people becomes honest in paying direct and indirect tax. What will government do apart from taxing petroleum products where no tax evasion is possible

    Like (2)


    Jan 9, 2012

    A bit confused about this - since we import a lot of our fuel, would we not pay international prices ?

    Like (1)
    Equitymaster requests your view! Post a comment on "The myth behind oil under recoveries". Click here!

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)