The government’s plan to defer share sales in exploration company Oil India Ltd (OIL) on its improved prospects owing to a lower subsidy payout this fiscal is sensible. No doubt, there is perennial political resistance against any rise in the price of diesel, a key element of the subsidy bill, owing to its mass consumption profile. However, the rising oil subsidy bill compounded with the inability to match the country’s imports with sustained exports is leaving the government little room to escape the prospects of diesel price deregulation. Since OIL bears a small portion of the subsidy bill, its valuation is bound to improve if diesel prices are freed.
While the tolerance of the political class to sidestep faulty economic polities extends right up to the point of an impending crisis, such a situation also offers room for radical measures. There are plenty of examples—the 1991 crisis that led to economic reforms, the 1998 Dabhol chapter that spurred power sector reforms, and more recently the perilous financial health of state distribution utilities that forced 13 states to revise tariffs.
This rewind is relevant in the present context. Rather than settling for a mere minority stake sale in OIL, the government must revive the “strategic” sale option, where control is handed over to a winning bidder. In principle, the sale of a majority stake in the exploration company will not only maximize the sale proceeds, but is also healthy for the exploration sector, which has seen less-than-satisfactory discovery of hydrocarbons by OIL and ONGC. This form of divestment will force the government off the subsidy crutch—once the sale is completed, there will be no scope for dipping into company coffers to meet the subsidy bill.
Importantly, such a sale should not degenerate into a desperate attempt by the petroleum ministry to maintain control over the company. In 2002, government-controlled IOC was nudged informally by the ministry to bid aggressively for IBP. IOC won the bid, quoting a staggering Rs1,153 crore against a reserve price of Rs337 crore, which was closer to the true valuation. The second highest bid, from Shell, was Rs595 crore.
The lessons from that disinvestment are instructive. Had IBP landed in private hands, it would have been difficult for the government not to implement the 2002 deregulation deadline—IBP then had an 8% market share in the retail segment; diesel prices could have been freed a decade back.
Ten years on, the government is again staring at a chance to revive the “strategic sale” route.
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