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Petroleum politics and economics

Should petro product prices have been raised when inflation is in double digits?

Here is a government that swears it is for the aam admi. But it acts in a manner that is completely against the interests of the ordinary Indian. Prime Minister Manmohan Singh is a world-renowned economist. Surely, he knows (more than most others) that double-digit inflation is like a back-breaking tax on the underprivileged. Yet his government goes ahead and increases the prices of petrol, diesel, cooking gas and even (the politically-sensitive) kerosene.

India imports over three-quarters of the country's total requirement of crude oil even though it has surplus refining capacity to export petroleum products. Domestic prices of petrol, diesel and other products were relatively stable between the middle of 2008 and the middle of 2009 when world crude prices careened from a record high of $147 a barrel to a low of less than $40 a barrel. Reason: the general elections were conducted in April-May 2009. Why then were domestic prices of refined petroleum products hiked when international crude oil prices have remained on an even keel, varying between $70 and $80 a barrel over the last year or thereabouts? Reason: the next general elections are scheduled to take place four years down the line.

The PM has said that "people are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making…The subsidies on petroleum have reached a level which is not connected to sound financial management of our economy. So, this decision has been taken to put some burden on the common people, but it is manageable."

Petroleum Minister Minister Murli Deora has calculated that an average consumer would now pay less than one rupee a day more for using cooking gas while kerosene users would shell out 26-27 paise extra daily. Kerosene is still priced at Rs 15 a litre, lower than what its "market determined" price would have been. Without any subsidy, each cylinder of cooking gas would cost Rs 225 more than at present.

But our political leaders are highly hypocritical. They don't disclose facts that indicate how the government takes away with one hand what is gives with the other and that the entire pricing and subsidy regime is highly opaque. Deora says 40 per cent of the kerosene distributed in the country is used for adulterating petrol/diesel and it is also smuggled out. For years, kerosene has not reached those who need it, nor has the fuel been used for cooking and lighting. Even after the latest price hike, the gap between kerosene and petrol/diesel prices is wide enough to ensure that adulteration will continue.

The 14 million petrol-consuming passenger cars in the country may be used by the well-off, but not the 80 million two-wheelers that also run on petrol. An estimated 4 million trucks and buses and the Indian Railways together use up nearly two-thirds of the total diesel consumed and close to a fifth is used in agricultural pump-sets and tractors. But the remaining 15-20 per cent of the total diesel consumed in the country is by owners of fancy cars and also for generating electricity - even to run air-conditioners.

No one believes the government when it says the increase in petroleum product prices will increase inflation by less than 1 per cent. The fact is that higher diesel prices have a cascading impact on the prices of a wide range of products, particularly food items. What the government has not publicised is that total taxes are over half the selling price of petrol and around 30 per cent in the case of diesel. Excise duties from petroleum products contribute 45 per cent of the Indian government's total excise collections. The government claims "under-recoveries" have mounted, but the balance-sheets of our maharatna public sector oil companies remain in the black. Importantly, private retailers like Reliance will now reopen franchised petrol pumps which had been lying closed since 2008.

So who gains? Consumers or corporate captains? The answer is apparent.

This article appeared in the March 15 - April 14, 2010 issue of Mutual Fund Insight