A private farce

Mukesh Ambani’s Reliance Industries has shut down its gas stations because it couldn’t sell its oil at prices lower than the competition. Now, one would not have given this piece of news a second thought if the competition had been fair. After all, businesses keep going bust all around the world. But what is different in this case is that the competitor is none other than the government.

While on one hand the government levies heavy taxes on oil to shore up its budgetary revenues, it also forces state run oil marketing companies to sell petrol and diesel at a loss as a matter of political compulsion. Now, if companies sell their products at a price substantially below cost, sooner or later they will go bankrupt. To fix this problem, the government issues long term bonds (called oil bonds) to these companies, which then sell them in the market at a discount in return for cold cash.

The value of these bonds is in tens of thousands of crores. And they represent current expenditure in the form of subsidy. But the finance minister keeps this figure out of the budget estimates and only mentions them in a separate note as a future liability, effectively understating government expenditure by that figure. You can sue Arthur Anderson, liquidate Enron and throw the World Com CEO in jail. But what do you do when the government indulges in such creative accounting practices?

This is the primary reason why private oil marketing companies cannot compete. They pay taxes on the oil, but don’t get a share in the oil bonds. So, either they have to sell at a loss to compete with the government, or sell at cost + profit and lose a substantial chunk of customers.

Private oil companies are not subject to pricing restrictions by the Government and are free to take their pricing decisions on commercial considerations, Petroleum Minister Murli Deora says. I hope he knows that he is joking.

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