RIL profit slide has pointers for government as well

Quarterly profits at the country's largest company, Reliance Industries (RIL), are down 21%, the biggest fall in three years. RIL makes most of its money from converting crude oil into refined fuels and petrochemicals, so it is important to note that its refining margin has contracted from $9.20 per barrel to $7.60 per barrel.

Though the fall is sharp, the actual number is better than expected: the consensus estimate from analysts was that the margin would fall to $7.20 per barrel. RIL itself expects this to change for the better: it is hoping to replace costly liquefied gas, used to heat its refineries, with cheaper syngas - a synthetic mixture of carbon monoxide and hydrogen.

This, analysts say, would prop up refinery margins by another dollar. RIL claims that it is still among the most profitable refiners in the world, but at least part of that edge is policy-induced. The government allows refiners to import crude oil at zero duty, imports of refined fuels attract an import duty of 2.5%. This implicit protection should go and at a time when the government is struggling with a widening deficit, it will make sense to charge 2.5% import duty on crude as well.

After months of dither, the government has allowed RIL to survey its offshore gas blocks in greater detail. This is essential for BP, which has bought into these blocks, to assess exactly how much gas there is and how much can be brought up. RIL's gas production has slumped in recent years, sparking fears that important power and manufacturing projects, which would rely on these supplies, might get stranded.

The government held off permission to explore for months, with the Comptroller and Auditor General (CAG) having raised questions about permissible costs. The delay in exploration has hiked costs for RIL-BP and could have set back India's power and manufacturing projects by years.

That, in turn, would have contributed to the overall slowing of the economy. It is not enough to have cleared a detailed survey of its exploration blocks, it must put in place concurrent audit mechanisms that excise delay and subsequent nitpicking by the CAG. It is not just RIL that gains from higher gas production. India needs all the gas it can pump out.