The complexities of Indian economy are a mystery wrapped in an enigma. With the crude oil price in the international market moving towards an alarming level of $ 100 per barrel, we are told, that an oil-importing developing country like India is “in serious trouble.” As the economy is witnessing a robust growth, the policy makers are concerned that the run-away oil price -- coupled with lack of political will to pass on the rise to the consumers -- could threaten the macro-economic stability of the country.

Against the backdrop of unprecedented rise in global crude oil prices, the state-owned Oil Marketing Companies (OMCs) are crying from the rooftop that they are incurring “heavy losses” by selling petroleum products much below the cost prices.

We are also told that the OMCs --Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) -- are currently losing over Rs 240 crore per day on four mass consumed petroleum products -- petrol, diesel, domestic cooking gas and PDS kerosene -- much below the cost.

“Rising crude oil prices is a serious problem which is not sustainable,” Planning Commission Deputy Chairman Montek Singh Ahluwalia recently observed at a CII meet. “The only sustainable policy is that while protecting the need of the really poor, if you do not pass on high crude oil prices to the consumers, you will kill your oil companies,” he claimed.

Is that really so? Then, how come none of the OMCs has gone bust so far? Both the OMCs and people like Ahluwalia want the common man to feel “guilty” and cough up more. But they are only telling half truths.

The tax component on petrol and diesel in India is one of the highest in the world and it is one of the biggest “cash cows” for both the Centre and the state governments. They do not want to sacrifice a single rupee in terms of multiple taxes and every time there is a price increase, they rake in the moolah like water from a seamless tap! 

The OMCs are, in fact, shy of acknowledging the fact that a major chunk of their losses is otherwise being made good by the government, state-owned oil exploration firms and also through marginal hike in retail prices of two auto fuels—petrol and diesel— made from time to time depending upon the political convenience of the ruling party at the Centre.

Looking at from a simple accounting procedure, the projected loss made by the OMCs in the absence of retail price revision is primarily a “revenue loss.” This is not a net cash loss as major chunk of the under-recoveries made by the OMCs by selling products below cost prices is finally made up through a complex cost sharing exercise.    

The government claims that the cost sharing exercise is based on the principle of equitable burden sharing among the different stake-holders.

As per the exercise, the government raises funds from the market through Oil Bonds and passes it on to the OMCs to make up significant chunk of under-recovering made by them. The state-owned oil exploration firms like ONGC, OIL and GAIL bear nearly one third of under-recoveries being made by OMCs by selling crude and oil products to them at a discounted rate—much lower than the international price.

As per third part of exercise, the Centre provides subsidies for PDS kerosene and domestic LPG through General Budget for every financial year. This total subsidy as allocated in the Budget is finally transferred to OMCs to take care of some amount of under-recoveries made by them. Sometimes, the Centre gives relief to OMCs by reducing duty rates on petroleum products.

Finally, the Centre depending on the prevailing political convenience allows OMCs to make marginal rise in retail prices of two auto fuels—petrol and diesel. Even by making marginal hike in retail prices of these two auto fuels, OMCs collect thousands of crores of rupees from consumers.