Privatization of the Oil sector in India

Introduction 

The Government of India has decided to privatize the oil sector. Privatization refers to the transferring of ownership, property or business from the government to the private sector. The Government ceases to be the owner of the entity or business. The government is currently privatizing various Public Sector Units including Bharat Petroleum Corporation Limited (BPCL). It is one of the largest investors in the Indian oil industry. The government’s action has been dubbed as the”largest privatization drive in history.” This is not the first time that the government is privatizing PSUs. Dr. Manmohan Singh (Former Finance Minister of 1991) introduced new financial reforms, one of which was privatization, to help India overcome one of the worst financial crises in its history in 1991. The government of former Prime Minister Narasimha Rao prompted this, with the idea being that the government should privatize the PSU and exit the business.

The scenario of Oil Sector in India

Though the oil sector in India is increasing rapidly, it is important to know where India stands in the world relating to the oil sector. With consumption of 5.16 million barrels per day (mbpd) of oil in 2019, India was the world’s third-largest consumer of oil in 2019. India is also the world’s second-largest oil refiner, with a capacity of 249.9 million metric tonnes (MMT). Rajasthan is India’s second-largest crude oil producer after the offshore field Bombay High, accounting for approximately 23% of total crude oil production. The oil sector of India was established in 1889 and the discovery of the first oil deposit was in Digboi in the state of Assam. ONGC (Oil and Natural Gas Company) is the largest company in the Indian oil sector, accounting for approximately 75% of total Indian oil production. India’s oil sector has been actively evolving and encouraging investment.

Government’s role in Oil Sector

The Ministry of Oil (MoO) is in charge of the country’s oil and gas industry, which includes encouraging investment, running infrastructure, planning, and recommending and supervising policies. The ministry also operates and manages 16 state-owned oil companies and five oil and gas training centers or institutes. The following are some of the major initiatives undertaken by the Government of India to promote the oil and gas sector:

The Petroleum and Natural Gas Regulatory Board (PNGRB) simplified the country’s gas pipeline tariff structure in November 2020 to make fuel more affordable for distant users and to attract investment for gas infrastructure construction. In November 2020, the Indian government urged OPEC to eliminate pricing anomalies for various regions in order to help the Corona-ravaged global oil industry return to normalcy.

According to the Union Budget 2019-20, the Ministry of Petroleum and Natural Gas has enabled SC/ST entrepreneurs to provide bulk LPG transportation through the Indian Scheme ‘Kayakave Kailasa.’ Bharat Petroleum and Hindustan Petroleum are state-owned energy companies. The Government is planning to set up around 5,000 compressed biogas (CBG) plants by 2023. There are several other initiatives taken by the government. Hence, the role of government is important in the oil sector. 

Importance of Privatization

Privatization always helps to keep consumer needs at the forefront, it assists governments in repaying their debts, it aids in the creation of long-term jobs, and it promotes competitive efficiency and an open market economy. In a rapidly growing economy like India, the government must realign its priorities in mobilizing the private sector’s skills and resources for the larger task of development. Privatization is done to reduce the burden on the government, to strengthen competition, to improve public finances, to fund infrastructure growth, accountability to shareholders, to reduce unnecessary interference, and to create a more disciplined workforce. The private sector has effective policies for dealing with externalities, which are driven by individual incentives.

The key to privatization is that private firms have a greater encouragement to be more efficient. Working for a government-run enterprise usually does not result in a profit. A private company, on the other hand, wants to make a profit, so it is more likely to be cost-effective and efficient.

BPCL Privatization

The Bharat Petroleum Corporation Limited (BPCL) is India’s second-largest refiner. It operates four refineries in Mumbai, Kochi, Madhya Pradesh’s Bina, and Assam’s Numaligarh. BPCL is one of India’s best public sector companies, with approximately 14,800 retail outlets. The company has done extremely well over the years, making the Fortune 500 list for the past 16 years. The company, which received the Maharatna status in 2017, has a market share of approximately 24 percent in petroleum products in India. As previously stated, the government owns approximately 54 percent of BPCL and announced in November 2019 that it would privatize various public sector units, including BPCL. The privatization of BPCL is critical to meeting the finance minister’s target of Rs. 2.1 lakh crore from disinvestment proceeds in the 2020-21 budget.

Following the announcement, various debates erupted over why the government wants to privatize an organization that has done exceptionally well in the industry. This decision shocked approximately 12000 permanent employees as well as thousands of contract employees. This sparked widespread outrage on their part. The government has taken a firm stance on privatization, and the Oil Minister’s statement that “the government has no business to be in business” speaks volumes about the government’s intentions.

Undoubtedly, there are certain impacts of the privatization of BPCL. BPCL, as a profitable unit, generates a monthly profit of Rs. 2050 crore. As a result, the economy would suffer in the long run. One of the consequences of BPCL’s privatization would be the impact on employment. The impact analysis of the country’s privatization of such a profit-making public sector undertaking would be clear only if a clear benefit analysis was performed.

Challenges to be faced

Talking about the challenges that will be faced, there are various challenges including the fact that these units are profitable is a major source of contention in the privatization of BPCL. Furthermore, the oil sector is critical to the nation’s strategic interests. As a result, there is no need for privatization in the oil industry.

Another important thing is that if BPCL is privatized is that multiple refinery units will be reduced to a single unit because private companies may not want to increase production. As a result, layoffs are possible. Furthermore, people are concerned that privatization will jeopardize new job opportunities. For instance, the Kochi refinery in Kerala is the only PSU that is actively recruiting people. Thus, privatization may hinder job opportunities.

Privatization in sectors such as oil may result in additional issues such as pollution. Because the primary goal of these businesses is to make a profit, they may not place a high value on pollution. The government can efficiently regulate these issues in PSUs and keep them at an optimal level. The same argument can be made for the social welfare motive that drives PSUs. This may be less significant for a private company. This would mean the end of several social programs, such as the distribution of fuel stations and the employment of vulnerable members of society.

Privatization results in the formation of private monopolies, such as water and rail companies. These must be regulated to prevent monopoly power abuse. As a result, government regulation is still required, just as it was under state ownership. In the private sector, there may be issues with transparency. The government may also miss out on the profits made by BPCL, which is a highly profitable unit.

Benefits of Privatization

While discussing the challenges to be faced, let’s not forget about the benefits of privatization. The primary benefit of privatization of the oil sector is that it will generate financial resources for the government to disinvest in public-sector enterprises. Privatization will put public enterprises in a competitive position, forcing them to improve their efficiency. The key to privatization is that private firms have a greater incentive to be more efficient. Working for a government-run enterprise usually does not result in a profit. A private company, on the other hand, wants to make a profit, so it is more likely to be cost-effective and efficient. Since privatization, most countries’ companies have demonstrated efficiency and profitability.

Privatization shifts the emphasis from political to economic goals, resulting in the development of India’s market economy. Privatization is critical because bad government policies and government corruption have a significant negative impact on economic growth. Privatization has the potential to improve a country’s economic situation. There is a lot of political interference in a public company. This may deter the company from making economically advantageous decisions. A private company, on the other hand, will not allow political factors to affect its performance. It does not motivate the public sector to increase production, use, and distribute resources more efficiently, resulting in higher costs and lower revenues. Allowing investment in the public sector helps to generate more capital, and it allows the public sector to invest their money and earn a higher profit. As an example, Following the introduction of LPG in 1991, more private companies entered the Indian market. Customer satisfaction has increased as private companies seek to retain customers as a result of competition from privatization, having benefits overall.

Conclusion

There is no doubt that privatizing the oil sector would have a significant impact on the country’s economy. However, there are some issues that may arise in the future. As a very successful PSU, BPCL has made significant contributions to the Indian economy, but it remains to be seen whether it can maintain the same level of profitability after privatization. Though, a number of people have expressed their dissatisfaction with the government’s decision, employees, workers, and trade unions have protested the decision. But the government, on the other hand, takes a firm stance in this matter. The government is dead set on implementing its disinvestment plan.

Privatizing the oil sector will enhance the growth of India overall. The more the economy will be generated and will be used for the purpose of solving the global issue in our own country. Generally, private companies don’t think about the social aspect and it will always be about their own profit and not for the welfare of the people. Hence, only time will tell if PSUs working well in the economy need a new owner in the form of private companies or should it be under government control.

Keywords: Indian oil corporation privatization, Oil sector privatization, Privatizing the oil sector, Advantages of privatizing the oil sector in India, Challenges due to privatization, Bharat Petroleum Corporation Limited (BPCL) privatization.

REFERENCES

• https://blog.ipleaders.in/study-privatization-oil-sector-india/
• https://www.economicshelp.org/blog/501/economics/advantages-of-privatisation/
• https://www.livemint.com/industry/energy/privatisation-plan-may-end-complex-cross-holding-in-oil-psus-11574581364737.html
• https://www.googlesir.com/advantages-and-disadvantages-of-privatization/

This article is authored by Riddhi Patni, Student at Maharashtra National Law University, Aurangabad.