PRICE STABILISATION FUND FOR PETROLEUM PRODUCTS

Is Finance Ministry Above Parliament?

Dipankar Mukherjee

THAT is what it appears to be if one goes through the 10th report of the parliamentary standing committee on petroleum and natural gas presented to parliament on May 22, 2006. Commenting on the action taken by the government on the recommendations contained in the earlier report of the committee on “Pricing of Petroleum Products”, the committee says:

 “The committee, in their original report, had emphasised that there was no justification in levying cess on indigenous crude oil if the amount generated from it was not being utilised for the oil sector and had recommended that a Price Stabilisation Fund should be created by using the money collected from cess to bring in stabilization in the prices of petroleum products. They had also desired that a part of the cess amount should be utilised to provide subsidy on kerosene and LPG. The ministry of petroleum and natural gas has agreed that there is a case for establishing a `Price Stabilisation Fund’ with funding from the cess on indigenous crude as the oil prices have been extremely volatile in the recent past and the oil companies have not been able to pass on the full burden to the consumers resulting into under recoveries. The planning commission has also supported the proposal `in principle’ for utilisation of cess for the  purpose of oil industry/operating the Price Stabilisation Fund. However, the committee are unhappy to know that the ministry of finance has not agreed to the proposal for setting up the Price Stabilisation Fund. They strongly disapprove of the negative approach of the ministry of finance to such a vital issue. The committee have further been informed that, as per their recommendation, the issue has again been flagged with the ministry of finance. They desire the ministry of petroleum & natural gas to vigorously pursue the matter with the ministry of finance at the highest level so as to ensure a positive result without any further delay and convey the progress made in this regard to the committee at the earliest."

ORIGINAL REPORT

In the original report presented to parliament on August 4, 2005, the committee had recommended:

 “At present, cess is levied @ Rs 1800 per tonne under the provisions of Oil Industry Development Act, 1974. The Oil Industry Development Board (OIDB) was set up in 1975 under Oil Industry Development Act to provide financial assistance for the development of the Oil Industry. Annual cess collection amounts to nearly Rs 5,400 crore. The committee have been informed that since the inception of OIDB and upto March 31, 2005, the central government has collected a sum of about Rs 55,966.81 crore as cess. Out of this collection, OIDB has received only Rs 902.40 crore till March 2005. The argument of ministry of finance is that the definition of `oil industry’ encompasses all activities directly or indirectly connected with exploration, production, and marketing of mineral oil and production of fertilizers/petrochemicals. They have even stated that the expenditure on “oil industry” has exceeded the cess collections. The committee, dismisses this argument as a far-fetched one. It is highly regrettable that large funds collected for a specific purpose i.e. to carry out oil industry developmental activities are not utilised for that purpose. The committee have already expressed their deep concern and strong objection to the practice of not adhering to the objectives of such a levy in their First and Fourth Reports (14th Lok Sabha). The committee again emphasises that there is no justification in levying cess if the amount generated from it is not being utilised for the sector and reiterate their earlier recommendation that a Price Stabilisation Fund should be created by using the money collected from cess on crude oil to bring in stabilisation in the prices of petroleum products. Besides, a part of the cess amount may also be utilised to provide subsidy on kerosene and LPG."

FAR-FETCHED ARGUMENTS

From the above it is clear that during the last two years, the committee comprising 21 members of Lok Sabha and 10 members of Rajya Sabha, had unanimously recommended not once but on four occasions creation of a Price Stabilisation Fund from the cess on crude oil to bring in stabilisation in the prices of petroleum products.  What has been the response? One Lahiri Committee was constituted in the year 2004 by the finance ministry to go into the issues, which have already been examined by the parliamentary committee. Then when the parliamentary pressure grew, the prime minister appointed another committee headed by C Rangarajan, comprising M/s Lahiri and others. The only purpose of these committees was to ensure that their exercise remains “revenue-neutral” to sustain major earnings from the oil sector. One of the far-fetched argument made by the finance minister himself is that fertilizer subsidy is being paid from the cess collected on crude oil. Now, the cess is collected through an Act of 1974 when Congress was in power. Fertiliser subsidy was introduced through retention pricing scheme in 1977 by Janata Dal government. As per Chidambaram’s  theory funding of fertilizer subsidy was conceived in 1974 itself in anticipation of fertilizer subsidy scheme of 1977! The hollowness of his argument is also clear from this year’s budget. For this year i.e. 2006-2007, budgetary provision for fertilizer subsidy has been pegged at the same level as in 2005-2006. But in this year’s budget the cess has been increased from Rs 1800/tonne to Rs 2500/tonne. What is the logic of increasing the cess when subsidy amount remains the same? The cess collected from the crude oil this year is estimated to be Rs 7500 crore as compared to Rs 5400 crore last year. This itself would give a lot of relief to Oil Marketing Companies (OMCs).

FAMILIAR ARGUMENT

Then, of course, the familiar argument by him and the corporate media “where from the revenue-shortfall would be made up”? The 10th report of the parliamentary standing committee says:

“The committee finds that surplus refining capacity has enabled the country to be a net exporter of petroleum products like diesel, petrol, naphtha, ATF, etc. For export of petroleum products duty drawback incentive is being given by the government. The scheme allows exemption of customs duty on crude in lieu of petro goods exported. In other words, exporting companies are exempted from paying customs duty on part of their crude imports in lieu of their export earnings. Under the scheme, the finance ministry forgoes customs revenue and the exporting companies benefit immensely, both by the duty concession and the exorbitant global prices for their products. The committee do not agree to such a concession, when huge international prices alone can take care of the profit of the exporters. The committee, therefore, recommends that the government should withdraw the duty drawback incentive for export of petro goods. The government can then make use of the revenue gains on customs front to bring down the excise duties on fuel and thus, pass on the benefit enjoyed by the exporters to the consumers in line with the stated policy of equitable distribution of burden."

The duty draw back is roughly Rs 3500 to 4000 crore.

LEFT PARTIES NOTE

But then who is listening? As a matter of fact, Left parties in their earlier notes to the government during the last price hike, had given these alternatives so that impact of the global crude price hike remains “price-neutral” to the consumer rather than “revenue-neutral” for the budget. But there has been no written response to the same from the government. There is, therefore, no point in discussing this issue further with the government when finance ministry is treating itself above parliament. It is time now for parliament to assert itself to see that reports of its committees are not trivialised by the executive through Lahiri committee, Rangarajan committee and who knows in future by a “Committee of Economic Editors”.