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.
*BPCL - Bharat Petroleum Corporation Ltd.; **HPCL - Hindustan Petroleum Corporation Ltd.;
|Net inflow for the Government/Outflow for OMC
|Company's Pre tax profits
|Duties as a % of pre tax profits (over and above the Corporate tax rate)
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.
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