The Government slashes equity infusions for three major oil sector CPSUs by 50 per cent, contradicting its 2023–24 budget commitments

In the Budget for the financial year 2023-24 (April 1, 2023, to March 31, 2024) presented on February 1 last year, the Union Finance Minister Nirmala Sitharaman announced an equity infusion of Rs 30,000 crore in three Central public sector undertakings (CPSUs) viz. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), are majority-owned by the Government of India (GOI). She had also proposed Rs 5,000 crore for buying crude oil to bolster its strategic reserves (SRs) in underground storages at Mangalore in Karnataka and Visakhapatnam in Andhra Pradesh.

The equity infusions in IOCL/BPCL/HPCL were meant to support their capital investment plans for the transition to ‘Green Energy’ and achieve ‘Net Zero’ objectives. Net zero refers to a situation where the emissions of polluting gases such as carbon dioxide due to human activities and their removals are in balance over a given period. On the other hand, the allocation for SRs was meant to guard against the possibility of any disruption in its supply.

 Under the above, IOCL and BPCL had done necessary spade work including approval by their respective boards for coming up with ‘rights issues’ of requisite amounts to enable the Union Government to give effect to its capital contribution (albeit by way of equity) promised in the budget. In the case of HPCL, the Oil and Natural Gas Corporation (ONGC) having acquired majority equity shares from the GOI in FY 2017-18 was to come up with the issue of the preferential issue to give effect to the latter’s budgetary intention.

However, in a big climb down, in November 2023, the Government reduced the amount of equity infusion to the trio by 50 per cent to Rs 15,000 crore even while deferring implementation of the budgetary announcement on the SRs. Meanwhile, the Interim Budget for FY 2024-25 presented by Sitharaman on February 1, 2024, didn’t show any allocation for equity infusion for FY 2023-24. The said amount has been earmarked for the FY 2024-25. This was confirmed by Finance Secretary T V Somanathan at a post-budget press conference. As for SRs, the budget documents do not provide any funds either in the revised estimate for FY 2023-24 or during FY 2024-25.

Why did the Government climb down?

Even as the Ministry of Finance (MoF) hasn’t given any reason, it seems the decision was prompted by a significant boost to their profitability during 2023-24. The IOCL posted a standalone net profit of close to Rs 40,000 crore as against a profit of a little over Rs 8000 crore during 2022-23. The BPCL posted a net profit of around Rs 26,500 crore in 2023-24, compared to about Rs 1,850 crore profit during 2022-23. The HPCL posted a profit of around Rs 14,500 crore during 2023-24 against a loss of about Rs 9,000 crore in 2022-23.

 When the companies can generate good profits hence, a good investible surplus for meeting their investment commitments, why do they need the Government’s budgetary support? But, there is much more than what meets the eye on a plain reading of the profit numbers. First, out of the net profit, a substantial amount is paid as dividends to the shareholders. For instance, in case IOCL @Rs 7 on a share of Rs 10 each, the payout during 2023-24 on a total of 1,412 crore outstanding shares would be around Rs 10,000 crore.

Second, these undertakings are engaged in the business of refining crude oil to produce a range of finished products such as petrol, diesel, LPG etc besides importing them to meet their demand. That makes their operations highly capital-intensive. Consequently, their investment requirements for expansion and growth are heavy. This is exacerbated by their commitments regarding the transition to ‘Green Energy’. While IOCL has decided to achieve ‘Net Zero’ by 2040, BPCL and HPCL intend to reach this goal by 2045.

Third, the most potent reason as to why the Government shouldn’t backtrack on the capital support once promised to oil PSUs has to do with the loss the latter had suffered during FY 2022-23, courtesy of directions given by the former regarding setting retail prices of petrol and diesel. To understand the full ramifications of such orders, let us look at some basics.

Petrol and diesel were deregulated long back in June 2010 and November 2014 respectively. As a result, oil PSUs got the freedom to fix their retail prices. The price is fixed as refinery-gate price or RGP (import parity price or IPP and export parity price or EPP of the fuel in the ratio of 80:20) plus freight, marketing costs, marketing margin, dealers’ commission taxes and duties. Considering that over 85 per cent of India’s crude oil needed for making refined products is imported (the balance 15 per cent is sourced from domestic companies such as ONGC, Oil India Limited or OIL) etc, an increase/decrease in its international price should lead to corresponding increase/decrease in the retail price of petrol and diesel but only if the marketing PSUs are allowed to fix the price strictly as per the formula. But, this is rarely done. The Government issues tacit instructions to IOCL/BPCL/HPCL (together, they account for around 90 per cent of the domestic fuel retail network in the country) to fix the retail price. This is driven by extraneous considerations. Ever since the start of the Ukraine war in February 2022, the international price of oil has been on the boil. The average of the basket of crude oil that India imports during April-September 2022 was $ 103.7 per barrel against the $90 per barrel that prevailed before the war started. But, these PSUs were told to keep the price of petrol and diesel unchanged for six months. This led to substantial under-recovery from the sale of these products.

For instance, in June 2022, the price of petrol in Delhi remained at Rs 97 per litre corresponding to the pre-war crude price of US$ 90 per barrel. This was despite the price of crude jumping to US$ 116 per barrel which would have required the price to be set at Rs 112 per litre. Consequently, on the sale of petrol during June 2022, the PSUs suffered under-recovery of Rs 15 per litre (112-97).

Cumulatively, the three PSUs incurred a loss of around Rs 40,000 crore during the first half of FY 2022-23. As the crude price started to decrease from October 2022 onward, their finances became a shade better during the second half. For the whole year, they posted a meagre profit of Rs 850 crore. The capital infusion of Rs 30,000 crore proposed in the budget for 2023-24 was meant to help them offset the losses incurred in the previous year.

Just because during FY 2023-24, they have improved their profits due to continuing moderation in the price of crude oil, it won’t be logical to trim the promised budgetary support. Moreover, they need some cushion to guard against crude prices moving north yet again; that possibility is not ruled out considering the continuing tense geo-political situation. For the same reason, the Government shouldn’t defer bolstering the strategic buffer of crude oil.

In sync with its emphasis on ‘predictability’ and ‘stability’ of the policy, having deregulated petrol and diesel, the Government shouldn’t interfere in the process of setting prices by the oil PSUs.

(The writer is a policy analyst; views are personal)