In a meeting with ministry of petroleum and natural gas [MPNG], parallel marketers of packaged domestic liquefied petroleum gas [LPG] viz. Reliance Industries Limited [RIL], Nayara Energy [formerly Essar Oil] and Total have demanded that the government allow them to have a level-playing field with the state-run oil marketing companies [OMCs] viz. Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL].
At present, only IOCL, BPCL and HPCL are allowed to sell subsidized LPG wherein consumers pay the full price upfront, but eligible beneficiaries [those with annual income < Rs 10 lakh] subsequently get back the subsidy amount in their bank account. Further, all domestic LPG producers have to supply their total output to OMCs [domestic supplies meet 50% of India’s total LPG demand].
In 2015, in a partial relaxation, the government allowed RIL to sell small quantities viz. 10,000 ton per month of its own LPG on the undertaking that it ensures imports of equivalent amount and supply to OMCs at cost-neutral rate. However, those quantities were meant only for catering to the un-subsidized customers [individuals with income >Rs 10 lakh and commercial users]
Essentially, what the parallel marketers are asking for is access to a slice of the 20-million-tonne-plus annual sales market for subsidized LPG cylinders and be part of the subsidy transfer mechanism. They have also demanded waiver of 5% custom duty paid on LPG import which is not applicable on OMCs.
Why should subsidy be routed only through OMCs? Why can’t private companies be roped in? Why should the government not give subsidy directly to beneficiaries bypassing any agency? Why should subsidy not be given to the poor only?
Routing subsidized LPG only through OMCs who also pick up entire output of private refiners – under orders from centre – puts the former in a monopoly position.
The OMCs fix the retail price as refinery-gate price [import parity price (IPP) and export parity price (EPP) in the ratio of 80:20] plus marketing cost, marketing margin, bottling charges, internal freight, establishment charges/overhead, dealers’ commission etc. They get a fortuitous gain due to ocean freight, ocean loss, insurance, LC [letter of credit] charges and port charges included in the IPP but in reality, not incurred on the quantity supplied indigenously besides cost padding in all other items of cost built into the price on cost-plus basis.
In the absence of competition from private players, the OMCs will continue to enjoy these fortuitous gains albeit at the cost of consumers. If, parallel marketers are also allowed then, the price will be determined by market forces [instead of extant formula-based pricing] offering the possibility of reducing the price besides improving quality and providing more customized services.
But, these benefits won’t be realized by continuing with the present dispensation of routing subsidy through the suppliers viz. OMCs or private. This is because in that scenario, the government would have merely extended to private companies the current formula/cost-based approach and associated vulnerabilities.
Another disadvantage of continuing with the current system is the delay in release of subsidy dues to the suppliers [read: OMCs]. Successive governments have been prone to using this tactics to show less expenditure in the budget – under the head ‘subsidy payments’ – thereby manipulating fiscal deficit to suit their objective. For instance, during 2018-19, subsidy dues of over Rs 32,000 crore to OMCs have been rolled over to the current year.
To realize the full benefit of private sector participation in LPG sale by unleashing forces of competition to result in lower price to consumers, the government should disband the current practice of routing subsidy through suppliers. The OMCs should operate like any other commercial entity at par with private entities.
In short, we should be looking at complete deregulation of the LPG supply, pricing and distribution even as the welfare objective is achieved by way of government directly dealing with the target households and crediting subsidy into their account. It should also consider restricting subsidy to the poor only [Rs 10 lakh income threshold as qualifying criterion is abhorrent; it must go].
Further, to ensure that the market is not cartelized by a few players, the government should liberalize extant norms for obtaining a fuel retailing license. An expert committee under Dr Kirit Parikh – set up by the MPNG – to “look at various issues related to implementation of existing guidelines for grant of marketing authorization of market fuels – petrol, diesel and ATF, identity entry barriers, if any, for expansion of retail outlets for private marketing companies and recommend easing of fuel retailing licensing rules” should come up with appropriate recommendations in this regard.
At present, the infrastructure for import terminals, storage, handling, transportation is mostly owned and controlled by PSUs. In this backdrop and in the absence of access to the basic infrastructure, liberalization of licensing rules by itself won’t help in involving private players in marketing and distribution. The problem can be addressed by hiving off these facilities to an independent entity which can offer them to marketers on ‘common carrier’ principle.
Further investment in development of infrastructure and its use has to be guided by the ‘common carrier’ principle only. The government should put in place comprehensive guidelines for access to the facilities in a ‘fair’ and ‘non-discriminatory’ and ‘transparent’ manner. An autonomous regulator should be entrusted with the task of implementing the guidelines and ensuring that monopolies/cartels do not make a comeback from the backdoor.
Modi has done well by using direct benefit transfer [DBT] to prevent leakage and misuse of subsidy thereby saving thousands of crore. However, there is an urgent need for major reforms by completely deregulating the oil sector and letting market forces drive all business enterprises including OMCs.