Petroleum and natural gas secretary M.S. Srinivasan on Friday blamed the government’s populist policies on fuel pricing acting as a handicap for the oil sector.
Srinivasan’s unusually candid comments, for a sitting bureaucrat in charge of policymaking in the same ministry, came just months before his June retirement.
“The unwillingness or inability of the government to go for market-determined prices could affect, hamper, handicap the oil sector in the days to come,” said Srinivasan, while addressing an energy seminar here.
“This will affect the energy security of the country over the next four to five years. We have to take corrective action or it will be very late by then. The question today is not only the loss of accountability but that of affordability,” he added.
On the sidelines of the seminar, Srinivasan also said: “We have taken it (statutory liquidity ratio, or SLR, status for oil bonds) up with the finance ministry and we expect a favourable consideration. So far, the bonds that were issued didn’t get that status. That may change.”
Candid speech: Petroleum secretary M.S. Srinivasan.
Indian bonds promptly fell as several news agencies reported the comments. Any such move could sap demand for other government bonds as banks, the biggest buyers of such debt, may not need to buy more of the securities to meet regulations.
Under Indian laws, banks have to park a minimum 25% of bank deposits in government bonds. If a bond gets an SLR status, it improves its marketability as there is a captive market (in banks) for it.
“Since most banks (already) hold oil bonds, the immediate implication is that demand” for (other) government debt will decline, said Kamlesh Chand, a fixed-income trader at IndusInd Bank Ltd in Mumbai. “Yields will be under pressure to rise.”
The yield on the most traded 7.99% note due July 2017 rose 6 basis points to 7.51% as of the 5.30pm close in Mumbai, according to the Central bank’s trading system. That’s the highest since 5 February. The price fell 0.41, or 41 paise per Rs100 face amount, to Rs103.20.
Despite being widely reported—the comments were made in front of several reporters, including a reporter from Mint—the petroleum ministry later sent a denial claiming: “Petroleum secretary has clarified that no such statement attributed to him has been made. He further clarified that the matter regarding all issues relating to oil bonds to be released to OMCs (oil marketing companies) are under consideration of the government.”
The overall pricing situation described by Srinivasan at the seminar stems from the nature of fuel retailing in India, where fuel prices are indirectly regulated by the government.
Though the so-called administered pricing mechanism was to be dismantled effective 1 April 2002, the Indian government still continues to control product prices. Public sector units operate almost 95% of the retail outlets across the country.
The Indian government artificially controls the prices of petroleum products, such as petrol, diesel, kerosene and liquefied petroleum gas, by subsidizing the public sector OMCs that then charge less from consumers. This subsidy, however, is not available to private OMCs.
At the seminar, Srinivasan also said that the private sector cannot continue operations because of these unrealistic policies.
Private sector oil marketing companies, such as Essar Oil Ltd and Reliance Industries Ltd, have said they been forced to shut several outlets due to the price mismatch at the government OMCs’ pumps and their pumps. As a result private sector OMCs are finding it more attractive to export most, if not all, of their refined petroleum products.
“Due to these policies, the upstream companies such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) are handicapped to share burden with the downstream companies,” Srinivasan said at the seminar.
With the international crude price trading around $90 per barrel (Rs3,573), the total under-recoveries of OMCs for the current fiscal (2007-08) will be Rs70,968 crore. Of this amount, the government will underwrite 57% by issuing oil bonds, the upstream companies such as ONGC and OIL will contribute 33%, and 8.76% will be absorbed by OMCs themselves.
“This will impede their ability to go overseas and acquire acreages. We are at a loss vis-a-vis China. We have been representing the same to the government for a long time to check these distortions,” Srinivasan maintained in his speech.
“The subsidies are throttling the oil PSUs, which is threatening their growth both in the domestic and international markets. They have hardly made any capital investment in the last two years. This in a scenario where energy is the backbone for this kind of GDP growth,”Ajay Arora, partner at accounting firm Ernst and Young, said.
Effective midnight Thursday, the Indian government raised petrol and diesel prices by Rs2 and Re1 per litre, respectively, which, analysts say, is not enough to align the domestic prices with international rates.
Anoop Agrawal of Bloomberg contributed to this story.