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Whose money is the govt giving away?

Tuesday, 27 May 2008 - 2:31am IST

Successive governments in India have always believed that the best way to solve a problem is to give away someone else’s money.

The subsidies provided by the oil producers come out of the pocket of the shareholders

Pradip Shah

Successive governments in India have always believed that the best way to solve a problem is to give away someone else’s money.

Faced with opposition protests on price rise, the central governments have been bottling inflation by asking oil companies to subsidise petroleum products for the consumers.
Till the price hike of Rs 2 per litre on petrol and Re 1 on diesel on February 13, the subsidy on petrol was Rs 7 per litre and on diesel Rs 8 per litre.  The total subsidies in this manner are estimated at about Rs 75,000 crore for the fiscal year ending March 2008.

The cumulative amounts are enormous.  Public sector oil companies are losing Rs 550 crore a day! Indian Oil Corporation is reportedly losing Rs 16.34 a litre on petrol, Rs 23.50 on diesel, Rs 29 on kerosene and Rs 316 on each cylinder of cooking gas. With oil prices now at $130 plus a barrel, the subsidy is far higher.

The government has promised compensation to the oil companies for fiscal 2008 of Rs 40,900 crore by way of IOU’s (bonds), not cash, leaving the upstream and downstream oil companies to bear the cost of Rs 30,100 crore.

Whose money is the government giving away?
The subsidies provided by the upstream and downstream oil companies come out of the pocket of their shareholders. These companies have a significant ownership by the non-government shareholders - FIIs, corporates and individuals including retired citizens, widows and children, directly or through mutual funds.

In ONGC, these shareholders have a stake of 25.86%, in Gas Authority - 42.66%; in Hindustan Petroleum, it is as high as 48.89%, in Bharat Petroleum - 45.07% and in Indian Oil - 19.65%. So, the Central government has been giving away money belonging to others.

What gives the government the right to give away the money which belongs to the shareholders?
The oil companies say these subsidies are determined “on administrative instructions of the Ministry of Petroleum & Natural Gas, Government of India”. There is no cess or a tax, which would require legislative powers, simply the diktat of the ministry. A clever bureaucrat may cite some provision of the constitution for supporting this diktat, but any lawyer will opine otherwise.

Any non-government shareholder in these companies can challenge in courts about this administrative instruction of the ministry.

If the government wants to win votes by keeping headline inflation low through subsidies on petroleum products, it should do so by explicit subsidies in the Budgets. The government is hoodwinking parliament, too. The bonds it issues to the oil companies do not figure in its deficit, only the interest on the bonds does. An open-ended subsidy is the road to fiscal perdition.

The Fiscal Responsibility and Budget Management Act passed by the parliament requires the government to bring down the revenue deficit to zero percent by 2008-09 and the gross fiscal deficit to 3%. Its accounting sleight of hand allows it to optically meet the targets set under the Act.

In the pharmaceutical industry where the government had price controls in place, many companies are exposed to cumulative liability for overcharging on drugs. In a similar fashion, the government is accumulating liabilities for claims by the non- government shareholders for subsidies paid from money belonging to them.

It should forthwith stop the practices of asking the oil companies under its control to subsidise consumers. Making subsidies explicit will force the present and future governments to avoid subsidies altogether, thereby avoiding profligacy in the use of precious fossil fuels.

Fair pricing of petroleum products will also encourage public transportation, a much desired need of the poor in our society, and allow commercial development of substitutes and alternatives.

The government may think it is a modern day Robin Hood, extorting subsidies from the oil companies for the benefit of the consumers. In reality it looks more like a Robbing Hood(lum).

Pradip Shah runs IndAsia, a corporate finance and private equity advisory service

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