//Saga of subsidies and corruption

Saga of subsidies and corruption

The petroleum sector is ailing, while the government continues to suffer heavy revenue losses
BHAMY V SHENOY Tuesday, August 29, 2006, Financial Express

It is a well-known fact that there is a lot of corruption in India’s petroleum sector. What is not known is the colossal amount of money involved. Or that this sector is used as a cash-cow by political parties. One of the strategic recommendations of the recent Planning Comm-ission report ‘Integrated Energy Study’ was to rationalise energy pricing. A similar recommendation was made by the Rangarajan panel.

PSU oil companies are bleeding while crude oil prices remain high. But there is no urgency on the part of the government or Opposition parties to reform the energy pricing policy. Take LPG. Consumers enjoy a subsidy of about Rs 150 per cylinder. The market for LPG in the commercial and automobile sectors is growing because of its flexibility as a fuel. Here, LPG commands considerably higher prices. As a result, at least 30% of LPG classified as domestic is diverted to this market and the government loses about Rs 16,000 crore, annually.

The situation is very different for petrol. With more than 42 million two-wheelers, 2.5 million three-wheelers and eight million cars, the official consumption figure for petrol is just 7.6 million tonne, as per 2004 data. This is gross under-estimation. The actual consumption is perhaps around 11.8 million tonne. At least 5% of the reported naphtha consumption, 10% of reported diesel consumption and 15% of PDS kerosene may be diverted to adulterate petrol. Consequently, the government loses at least Rs 13,000 crore of revenue per year.

Petrol-pump owners stand to make enormous profits through adulteration. The reason for such adulteration is the huge price difference between naphtha, diesel and PDS kerosene.

When PDS kerosene is sold for Rs 9 per litre, petrol for Rs 55 per litre, and the petrol-pump owner is given a small margin of Rs 0.64 per litre, the temptation to adulterate is huge.

As for autorickshaw drivers who are hardly able to earn a decent profit, blending just three litres of kerosene with an equal amount of petrol every day can increase their earnings 100%. Blending with diesel though not as profitable as with kerosene is still profitable as there is a difference of about Rs 17 per litre between these two products.

Though the international price of diesel is higher than that of petrol, in India diesel is cheaper because of the higher tax on petrol. So diesel is diverted for blending with petrol, and kerosene is diverted for blending with diesel. Blending of kerosene with diesel results in a loss of at least Rs 5,000 crore to the government. Since kerosene is subsidised to the extent of Rs 12.00 per litre or Rs 14,000 per tonne, petrol-pump owners, besides saving on taxes stand to gain from subsidies intended for the poor. PDS shop-owners are also beneficiaries. The misuse of subsidy amounts to Rs 6,000 crore annually. The total tax revenue loss to the government or the subsidies cornered by pump owners, PDS shop-owners, autorickshaw owners and LPG dealers amounts to Rs 40,000 crore.

This is a staggering amount. And the corruption pie is shared not just by petrol dealers, but goes into the pockets of bureaucrats and politicians too. As a result, there is no constituency for stopping this siphoning of tax revenues.

It will not be easy for any new committee of experts or the Planning Comm-ission to streamline the irrational pricing of petroleum products. However, by publicising the losses to the government and instituting creative ways to help those below the poverty line, it should be possible to bring down the difference between the prices of petrol, diesel and kerosene. By decreasing tax on petrol and increasing it on diesel and kerosene, the government can collect the same amount of tax as before and at the same time reduce adulteration and corruption.

Kerosene can be made available to the poor through kerosene stamps. Such a scheme was successfully implemented in some districts of Karnataka a few years ago but was dropped thanks to pressure by the political class. Now, the Planning Commission has suggested the use of the smart card. By reducing taxes, the government may even be able to earn higher revenues following a reduction in adulteration. What’s needed is strong political will, something lacking today.

—The writer has worked in the oil sector for many years and at present is convenor, Mysore Grahakara Parishat