Those who don't read history ...

Those who don't read history ...
Sunil Jain

Visibly upset over the moves being made in Kashmir by the then Prime Minister, the late Rajiv Gandhi, Governor Jagmohan wrote to Rajiv advising him to read the history of Kashmir before embarking on any grand strategy. ``I don't read history, I make it'', an imperious Rajiv retorted. Always dogged, Jagmohan had the last word: ``Those who don't read history, make bad history''.

The sad history of those who don't read history is being repeated all over again, this time in the country's oil sector. So far, government policy is to massively subsidise supplies of kerosene, LPG and diesel, and try to make this up by over-charging on the supplies of petrol, aviation fuel and other so-called upper-class items of consumption. This system of cross-subsidy, however, still leaves some deficit this is called the `oil pool deficit'.

The oil pool deficit is never taken on to the accounts of the government, but is put on the books of the public sector oil companies as money owed by the government.

Around three years ago, this oil pool deficit reached around Rs 18,000 crore, and the oil companies found that they were fast running out of cash you see, with the government owing them a whopping Rs 18,000 crore, no one was willing to lend these companies at reasonable rates of interest. So, the oil companies reached a stage where they were not able to finance further imports of oil. It was then that the United Front government issued oil bonds, which were then used as collateral to raise funds to finance imports.

Today, the country is in exactly the same situation the oil pool deficit is around Rs 18,000 crore, and the oil companies are once again finding it difficult to raise more funds to finance imports beyond a few weeks.

So how did things come to such a pass? Precisely because the BJP-led government chose to learn no lessons from the past. You see, once things had deteriorated so fast, the United Front government embarked on the process of reducing the cross-subsidies to a bearable limit, of dismantling the ridiculous system of controls in the sector, to eventually free it up completely. It decided that diesel prices would be kept on par with international prices, that subsidies on kerosene and LPG would be phased out by around a third a year, and that after March 31, 2002, the remaining subsidy would be transferred to the general budget.

Great, except when it came to power, the BJP-led government (both ti-mes around) thought it could cheat history, and so decided to act smart (read populist). In its very first stint, instead of allowing diesel prices to be adjusted each month by the oil sector bureaucrats and, at that stage, prices were not even rising too much, and consumers would have adjusted to it easily it decided to make the decision a political one all over again.

And diesel prices were hardly raised.Similarly, while kerosene and LPG prices were raised, instead of being done at the beginning of the year, it was done towards the end that way, they kept to the schedule in letter, but actually added to the oil pool deficit by delaying adjustments. The same story continued in the government's second stint. The consequences of this will now have to be dealt with by the government, in either today's meeting of allies, or sometime next week.

Will the government bite the bullet this time, and raise prices to the requisite levels according to an ad released by the government to prepare people for the hike, the current subsidies are a whopping Rs 170 per gas cylinder, Rs 8 per litre of kerosene and Rs 5 per litre of diesel. Now, clearly, there is no question of the government being able to make huge cuts in subsidies look at what's happened in the more developed and vastly richer countries in Europe with oil prices touching decadal highs.

But this is exactly the point. Even if the government issues bonds, or reduces excise and customs duties to cushion the impact, this is at best a temporary measure any reduction in duties will, in any case, hit the fiscal deficit and therefore overall economic growth. The point is that the government has no option but to pass on the major portion of hikes to consumers on a regular basis, not just in the oil sector but everywhere it has no surpluses anywhere to be able to absorb them.

The list of the government's sins of omission in the oil sector goes on. Lulled by the exceptionally low prices of the last few years, the government allowed things to further slip in the oil sector. Oil production, primarily from ONGC, slipped from 30.4 mn tonnes in 1990-91 to 24.7 mn last year; and not only did ONGC reduce the number (and acreage) of the wells drilled to extract oil, the number of fresh exploratory wells drilled to find new reserves fell dramatically, from 240 to 145.

Now it's easy for the government and petroleum minister Ram Naik to blame OPEC for the current mess we're in, but as the saying goes: Men are sometime are masters of their fates/the fault, dear Brutus, is not in our stars/but in ourselves ...