Competing with the government

While much has been made of the lack of progress in disinvesting public sector units (indeed, the government appears to be keen on re-investing in some cases!) and the resulting fiscal strain, this is the least of the country's problems. For, as the Left parties keep pointing out, a slight increase in tax collections, or a concerted attempt to tackle the huge tax arrears, would more than make up for the money that could have been got through privatisation/disinvestment. The real loss is not even the money these PSUs lose every year, it is the impact this has on the profitability of private firms. Nowhere is this being felt more acutely today than in the oil sector.

Thanks to the fact that the oil-marketing firms are still predominantly government-owned, retail prices of petrol have been kept at Rs 3-4 per litre below prevailing global levels (it's Rs 5-6 for diesel). This is expected to cost these PSU oil firms around Rs 100,000 crore this year. As a result of this subsidy, private sector firms like Reliance Industries which had managed to carve out a 10-12 per cent market share had two choices--either sell petrol/diesel at the same below-cost price as the PSU oil firms or lose out on market share. Since supplying at the same price as the PSUs would mean a drain of several thousand crore rupees each year, Reliance has naturally chosen to reduce supplies. The company, whose market share has now fallen to around 1.5 per cent in the case of diesel, is now coming up with various alternatives to pacify its warring dealers. These include giving flat fees to them on the basis of their investments, using part of their facilities as warehouses for the Reliance retail venture and so on.

Though the company's suggestion that the government extend the oil subsidy to it as well has been dismissed by most as yet another attempt by the well-connected company to get the government to favour it, the case for it appears a strong one. For one, since a consumer who stops going to a Reliance outlet will now buy from a PSU outlet, the government will end up paying for the subsidy anyway. So, why not just give the subsidy to Reliance in the same manner that subsidies are given to anyone who offers to set up uneconomical village phones today? Second, and more important, when Reliance invested in the oil sector, it was not told the government-owned competition would sell its products at Rs 100,000 crore below cost. Had this been clear from day one, there is no way Reliance, or any other company for that matter, would have invested in the oil business.

Indeed, on a much smaller scale in the early 1990s, private firms invested around Rs 1,000 crore to set up LPG infrastructure after being told the subsidy regime would be phased out. Since this never really happened, and customers preferred to buy subsidised LPG from the PSU oil firms, most of these private firms went bust and have left the country. You can now expect the same to happen to the refining and marketing sectors.

But what about the telecom sector, the diehards still argue. If Hutch and Airtel could prosper despite having BSNL and MTNL, who were providing below-cost services (local calls used to be heavily subsidised by overcharging on domestic and international long-distance calls, which were their monopoly), why can't Reliance do the same in the oil sector? One reason is that the situations aren't comparable. While the public sector phones were certainly cheaper, there just weren't enough of them going around. So, if a consumer wanted a phone, he had no option but to go to Airtel and Hutch, even if they cost more. The same doesn't apply here since there are enough PSU oil outlets available and none of them is short of petrol or diesel.

Of course, even this was not enough to ensure the private sector phone firms did well. For, though it took a while to implement and the implementation was patchy, the focus of telecom regulation in the last decade has been about ensuring the incumbents did not abuse their power by under-pricing their services (as the PSU oil firms are doing), or cross-subsidising them from profits made in other areas. This was the reason why, for years, the private operators and the regulator wanted BSNL to file separate accounts for all its businesses. This is also why there was such a pitched battle over the access deficit charges--the private operators believed BSNL was using this to lower tariffs for its cellular phones.

Indeed, had there been an oil sector regulator in place today, it would have had no option but to ensure the government compensated firms like Reliance for such under-pricing. In the electricity sector, where the Delhi government wanted to keep tariffs low, to cite a similar case, it actually gave a subsidy to the new private players (BSES and NDPL) to ensure this. What is curious is that, despite having such a strong case, Reliance is keeping a very low profile on the matter.