 Hello and welcome to NewsClick. Today we have with us Dr. Surya Seti, a well-known energy expert who has been principal advisor on energy to the Planning Commission in the past. Surya, good to have you with us. Thank you. Of course, oil and gas prices are in the news currently. What explains this term called under-recovery? What does it really mean? Because government seems to use under-recoveries to justify price hike for oil and other hydrocarbons. The first thing that you must understand, which is not clear at all, at least to the general public, is that under-recovery is not a loss. It is often treated as if somebody has lost money because there is an under-recovery. Under-recovery is simply the difference between a notional price, which is calculated based on a formula which was crafted on an import parity price. The formula includes freight pooling, it includes import duties, it includes loss in transit, so many other things. So, you get an import parity price at the point of sale and against that import parity price, if the company is getting, let us say the import parity price is X and the company gets X minus 2, 2 is the under-recovery. It is not that X minus 2, the company is losing money. At X minus 2 also the company may be making money. So, under-recovery is simply a difference between a notional price, which is a meaningless number, and what the actual realization is. It is not a loss. If you look at this, the oil companies which are making so-called under-recoveries are still making profits because they have all shown profits on the balance sheet. Not only are they making profits, but even the under-recoveries themselves are paying themselves. The logic of under-recovery is if they were losing money, then how can the same government turn around and say that upstream companies absorb one-third of that under-recovery, downstream companies absorb one-third of the under-recovery, and the government will pay the balance one-third out of government bonds or whichever way they will pay. Now, originally they were paying with government bonds, recently they have said that they will not pay that in cash, but it has so far not happened. But the very fact, I mean people are not questioning that look, here is something you called an under-recovery, which is touted as if it's a loss to the company, and then you ask the same company to absorb that under-recovery to the extent of one-third at the upstream, one-third at the downstream, and the remaining. So the net result is that basically the bottom line of all this is that we simply don't seem to have a clear-cut policy. On paper, we have an import parity pricing policy, which was changed after a lot of we wanted trade parity. Then Rangarajan committee said, I forget 60 percent import parity, 40 percent trade parity or some proportion of that. But the moment you pass the under-recovery back to the company, it neither remains trade parity nor import parity, it's an ad hoc price. And the problem is that that sharing of those under-recoveries is an ad hoc arrangement that is decided on a year-to-year basis. So companies don't even know exactly what price they are going to get. I mean ONGC has been clamoring from years together that they say we don't mind paying, but please tell us how much and fix it for us so that we know where we stand. I mean, just to give you a foolishness of this under-recovery, which I think is very illustrative. Again, my numbers may be wrong because I'm speaking from memory, but if I remember right, ONGC showed by numbers that if the import, if the traded crude price, the international price of crude was $60 based on absorbing under-recoveries, they were getting netting $57 per baron. If the crude price went to $120 in the international market, because of their share of under-recoveries, they will now get only $37 per baron. So I mean, this is the foolishness of these under-recoveries. They still make money at $37. It's not that they're losing money. But when the crude price in the international market has doubled from $60 to $120, their take per barrel has reduced from $57 to $37. It also raises the question of how the $57 is the right answer. That's a separate issue. Coming back to the other issue, the government claims that subsidies in the oil sector are high. That's why they're forced to raise prices. But Indian diesel prices at the pump are higher than the US diesel and petrol prices. How do we explain this so-called subsidy? See, there is no subsidy on Indian energy. I mean, if anybody tells you that the Indian energy sector is subsidized, they're not telling you the truth. And I'm talking purely the energy sector. Food is a separate issue and fertilizer is part of the food chain. Now, if you look at the total taxes collected on the entire energy sector, not just the petroleum sector, I'm also including the power sector, because I treat the losses in the power sector, which are cash losses are running somewhere between 40, 45,000 crores. I'm including that also as a subsidy because the cash loss is nothing but it may be theft, it may be whatever, but fact of the matter is that the state electricity board loses that money, loses cash to that extent. Now, even if I include that, the total taxes collected on the energy sector far exceed the total subsidies. So to say that there is a heavy subsidy and that is causing a fiscal issue is simply not correct. The energy sector is still a net contributor to your fiscal revenues rather than a drain on the fiscal revenue. A subsidy should be a drain on your fiscal revenue. Here, there is no net subsidy. Now, you may argue that you have limited means of raising taxes, so you can't just give away these taxes. But these are taxes, these are not stuff that you own. I mean, to give you even a more radical example back to that under recovery, because remember, ONGC, IOC, these are public limited companies. Government is a shareholder of this company. I can go and buy a share in this company and be a shareholder. Now, the beauty of the under recovery or the way the tax is working is that one shareholder gets a disproportionate amount for holding that same share because the government can dictate how much under recoveries will be absorbed by which company which reduces my net profit per share, but the government has gone away with those under recoveries that is fiscal revenue. Now, which is the shareholder of this company. How can a public limited company be allowed to do this in this country? All shareholders must be treated equally. If the government wants, and this is what the oil sector has been saying, if the government wants, nothing wrong. They can impose a tax on the thing and say that look, because this is a domestic resource, I'm going to tax this resource, petroleum tax of so much on the ONGC. At least that is evenly applied. Today, that is not being applied to say a private sector entrepreneur who has no under recoveries to pay for. He gets the international price for his crude more than the international price for his gas. And you know, he's very happy, but in the public sector bears the burden for that. Public sector is still again, I want to emphasize still doesn't lose money. But the fact of the matter is that despite this kind of rigmarole of taxes and subsidies at the same time, the net result is that our prices for energy today are the highest in the world. Nobody in the world pays more for energy than Indians. Either electricity, either electricity or hydrocarbon either any form of energy, we are paying among the highest prices in the world for any form of energy, commercial energy, I should say, because traditional biomass, traditional energy is luckily outside the realm of the government. So that operates on a different scale altogether. But commercial energy, there is nobody in the world who's paying either we are paying equally high or higher than anybody else in any form of energy. So to say that we are subsidizing is just misleading the public. Coming back to the issue had raised that the private owners, basically the refinery companies and so on, are actually getting the benefit of the major part of the subsidies in the way that's now being structured. Would you if I was a private entrepreneur and I struck oil, for example, I would get the import parity prices. Oil was trading at $60 a barrel. I would get $60 a barrel if I sold it domestically. If I exported it, I would get whatever the international trade parity price for that quality of crude is. But my public sector doesn't get that because they have to pay for these notional under-recoveries, which is again because the import parity price of that same crude of oil is $65, but he has to pay some of the under-recovery. So he actually nets $57. But is there any justification? Why international prices? For instance, gas, the KG gas was there and other issues are there. Is there any justification? There are two schools of thought on this. And in fact, South Africa has done something very different from, I mean, the pure economic theory is that all resources must be valued at their border prices to have efficient allocation of resources. Now, I completely subscribe to that. I have no problems with that. But that must be applied consistently across the sectors. We do not do that consistently. For coal, we have one policy. For oil, we have another policy. For electricity, we have a third policy. So there are distortions within the sector. So that's one aspect of it. The second argument that some people are giving and which is not without merit is that if I have a domestic resource, why should I price that at an international price? Because I'm not pricing the rest of my things in the domestic sector. I don't get an international salary, for example. My food is not priced at an international price. Why should only energy be priced at an international price? So that's a valid argument also. And my personal view, if you want to know my personal view is, I think whether you price it internationally or price it in a different manner, energy will remain. It's a merit good. A lifeline level of access to energy is a merit good in this country. The fact that two thirds of the population has no access to commercial energy should be a bigger problem than how we price this. Whether we subsidize at one end or we price it at the other end, it's a matter of where you want to, which is more efficient, economically more efficient, but we will need to make sure that this access is guaranteed in some form of fashion. And at current prices, we are not going to be able to give this access and we are not going to be able to deliver the so-called inclusive growth unless we provide access to commercial energy.