India’s government is asking its largest oil company to sell fuel below global prices

• Officials from the petroleum ministry have said that the government will ask ONGC to sell it’s fuel to refiners and distributors at around $70 a barrel.
• Global oil prices are currently $79.5 a barrel.
• The move is significant, and along with a cut in dealer commissions, could reportedly cut fuel prices by around ₹2 a litre.

With fuel prices rising for the eleventh consecutive day this morning, India’s government is finally stepping in to avert a full-blown crisis. But rather than endangering the revenues it receives from taxes and duties on petrol, given its widening fiscal deficit, it is asking India’s largest gas and oil exploration company to take a hit.

Officials from the petroleum ministry have said that the government is looking to get the state-owned ONGC to sell its fuel below the current global price - which is $79.5 a barrel at the moment. A price level of $70 a barrel was mooted. Concurrently, the government is also asking dealers and distributors to reduce their commissions by as much as ₹0.23 a litre.

The move is significant, and will reportedly cut fuel prices by around ₹2 a litre. ONGC accounts for nearly 70% of India’s domestic oil production and supplies to all of India’s major state-owned refiners- Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum.

Until mid-2015, ONGC and the government worked together to relieve consumers from higher LPG and kerosene prices through a subsidy-sharing agreement. However, as global oil prices began to plummet, the national oil producer was off the hook.

Welfare schemes could be affected

If the latest burden-sharing scheme with ONGC proves to be ineffective, then the government will have to cut excise duties - something that it is evidently reluctant to do. Excise duties on fuel help fund a lot of government programmes, including subsidies for exporters and spending on education, infrastructure and health.

Nitin Gadkari, the Union Minister for roads and highways, issued a warning in this regard. Speaking to the Indian Express, Gadkari said that any subsidies for petrol and diesel would result in the diversion of funds from social welfare schemes. A few schemes he mentioned included health insurance, irrigation, free LPG and the Mudra loan scheme for small businesses.

A long-term solution

Yesterday, India’s law and information minister, Ravi Shankar Prasad, offered reporters an idea of the government’s plans, explaining that a long-term solution was in the offing and that it didn’t involve a cut in duties. Prasad singled out the daily fluctuations of fuel prices, a consequence of the dynamic pricing regime that was instituted last year, and added that the burden of higher prices should fall not only on the government and consumers, but on fuel distributors as well.

However, for now it seems that the government will only rely on short-term solutions like asking ONGC to cut its oil prices. Given that national elections are around the corner, it is unlikely to push for a long-term reform in India’s fuel pricing regime unless it is assured of a new five-year mandate. Global oil prices, meanwhile, are expected to rise to $90 a barrel by 2020, according to Morgan Stanley.

For it’s part, ONGC has pledged to reduce India’s dependence on oil imports by doubling its production within the next four years. In order to do this, it will have to be able to support its capital spending, which will be hard if it sells its oil at below-market prices. Hence, the government will have to step in again. As is evident, there are no easy fixes in the short term.