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Are oil companies making losses?

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HT reports:

[Union minister Vayalar] Ravi, in a letter to petroleum minister S Jaipal Reddy, questioned the claims of oil marketing companies that they are incurring huge losses and asked his cabinet colleague to scrutinise the issue in detail.

He is the second union minister after defence minister AK Antony to have expressed unhappiness at the petrol price increase. Antony had on Wednesday criticised the hike saying it was “not a correct step” and the oil companies should have shown some “propriety” before taking the decision.

“Apparently, the claim made by oil companies that they are running at a loss seems to be untrue. As a matter of fact, the expenditure of oil companies, including salaries, is among the highest in India and there is a perception that funds are being wasted,” Ravi, the overseas indian affairs minister, said in the letter.

Moneycontrol reports on a clarification by the CEOs of the public sector oil companies:

Three state-owned oil companies have issued a statement denying that they are making huge profits and stated that the petrol price hike was necessary.

The CEOs of Indian Oil Corporation, Bharat Petroleum and Hindustan petroleum have said that the firms had incurred huge losses of over Rs 15,000 crore rupees between April and December 2011. And that a combined bailout package totally Rs 1.38 lakh crores had helped them post nominal profits.

“It is only after the assistance (subsidy) of Rs 83,500 crore from the government and Rs 55,000 crore (grant) from the upstream oil companies (ONGC, OIL and GAIL), totalling Rs 1,38,500 crore, the three public sector OMCs could declare nominal profits,” the statement said.

Had this assistance not been given, the three OMCs would have reported a combined loss of Rs 1,32,000 crore, it said.

The three OMCs together had a combined turnover of Rs 833,000 crore during 2011-12. Against this, they had declared a combined profit of mere Rs 6,177 crore, which is only 0.7 per cent of their turnover.

The combined turnover of INR 833,000 crores but a government assistance of INR 1,38,500 crore. The government assistance is about 10% of the union budget, which is 84% more assistance than turnover!

In this time of austerity, is the government overpaying for modernization and salaries? If it is “modernization”, then this is quite likely to be the kind of unplanned “fleet modernization” which has pushed Air India into the red. If it is salaries, as Vyalar Ravi claims, then it certainly bears looking into, given that Mr. Pranab Mukherjee is imposing austerity measures across the board.

Part of the reason for the incredible shrinking rupee is the huge debt burden of the government. Debt servicing takes up around 30% of the budget, whereas the government borrows more than 30% of the budget, thereby pushing India ever deeper into the red. There is good reason to save on subsidies wherever possible. By oversubsidizing the state-owned oil companies, whose shares are traded, the government is transferring our tax money to shareholders. In other words, we are all paying for the oil thrice over: by way of increased prices, by way of taxes, and finally by way of the falling rupee.

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Written by Arhopala Bazaloides

June 4, 2012 at 4:12 am

One Response

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  1. […] The oil subsidy is reported to be INR 1,38,500 crores, ie, about a third to about half a per cent of the GDP. […]


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