Crude Governance | Value Research The government seems to care two hoots about controlling inflation, writes Paranjoy Guha Thakurta…
Economic Viewpoint

Crude Governance

The government seems to care two hoots about controlling inflation, writes Paranjoy Guha Thakurta…

In view of the ongoing turmoil in large parts of North Africa and West Asia where much of the world’s exportable crude oil surpluses are located, one can only hope that oil prices will not go through the ceiling again. If, for instance, prices touch their July 2008 peak of US$ 145 a barrel, a double-dip recession across the globe is likely to take place. Even if such an alarmist scenario does not materialize, many analysts are of the view that oil prices are probably going to hover around the US$ 100 a barrel mark for the better part of the current calendar year.

This is pretty bad news for India. Finance Minister Pranab Mukherjee’s budget arithmetic is certain to go haywire as a consequence. And the reasons why this will happen are so obvious that one is frankly mystified as to why the Finance Minister made the kind of assumptions he did in his budget. On March 24, Mr Mukherjee expressed concern in the Rajya Sabha about the instability in West Asia, an area from where India sources two-thirds of its total imports of crude oil. He was worried if supplies would get disrupted on account of the civil war in Libya. This country currently imports 80 per cent of its total requirement of crude oil. Oil is the biggest item in India’s import bill, accounting for roughly one-third of it.

This is what the Finance Minister said: “If you look at our oil requirement... out of 100 million tonnes imported last year, 67 million tonnes came from Middle East alone…If the situation remains unstable there, it is quite natural for anyone to express concern and to hope and to try to restore normalcy, peace and stability in the region because our vital interests are linked to that…why did I refer to the crisis in Middle East… Not to find a cover to have some excuse that the prices will go up. It is not that. Today, my primary concern is about the availability... it is not an excuse.”

International oil prices have been extremely volatile and unpredictable of late. In 2008, after peaking at a historically high level in July, crude oil prices collapsed to below US$ 40 a barrel by the end of the year and fell further before rising gradually right through 2009 and 2010. Then, after the unrest in Tunisia spread to Egypt, prices again jumped from around US$ 90 a barrel to US$ 120 a barrel between December and January. If high global oil prices are a reality we in India have to live with, should the Finance Minister not have factored this into his budget calculations which were presented on the last day of February, by which time, prices of crude oil had already hit a 30-month high? Why did he assume that there would be no extra outgo on oil subsidies and, in fact, reduced the Union government’s total non-Plan expenditure on subsidies by over Rs20,000 crore? This is indeed inexplicable.

While the government deregulated petrol prices in 2010, prices of diesel as well as kerosene and liquefied petroleum gas remain administered. The neo-liberal hawks in the government argue that “under-recoveries” of public sector oil refining and marketing companies should not go up substantially, nor should the fiscal deficit. What this implies is that the prices paid by the consumer for these three petroleum products will have to rise, literally adding more fuel to inflationary fires that continue to rage.

Public sector oil companies are expected to lose Rs1,74,000 crore during 2011-12 if consumer prices of diesel, LPG and kerosene are not increased, which would be over two-thirds more than what these firms lost in 2008-09 when crude oil touched an all-time high. On the three subsidized products, public sector companies like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum lose the following amounts: close to Rs17 per litre of diesel, Rs28 per litre of for kerosene and Rs315 for a domestic LPG cylinder. In 2008-09, the government had issued oil bonds worth Rs71,292 crore to the three firms mentioned to make up for more than two-thirds of the revenue loss. Upstream oil firms like the Oil & Natural Gas Corporation provided another Rs32,000 crore.

There is an expectation that soon after polling in the state assembly elections ends on May 10 and before the results are declared on May 13, government administered prices of diesel (and perhaps even LPG and kerosene) would go up. There is also a section in the government that is arguing for decontrol of diesel prices.

What would be the implications of decontrolling diesel prices? Diesel is the largest selling petroleum product in India in terms of tonnage as well as value, accounting for roughly 40 per cent of the total value and around 60 per cent of the volume of all petroleum products sold. Diesel is the main fuel used for transportation of goods (both by road and rail) and is also used in agricultural pump-sets. Higher diesel prices have a cascading impact on the prices of a very wide range of articles of mass consumption, especially food items.

Although petrol is consumed primarily by the rich for personalized transport, LPG is used by the middle classes while kerosene is supposed to be used by the poor for cooking and lighting. However, much of the kerosene distributed by state governments is illegally diverted for adulteration of petrol and diesel and also smuggled out of India. The administered price of kerosene went up from Rs9.30 a litre in January 1998 to around Rs12.50 a litre in June 2010. Still, since the subsidy on each litre of kerosene sold is Rs28.18, there is a big incentive to illegally divert kerosene because of the gap between kerosene prices and those of diesel and petrol.

But illegal diversion of kerosene is also the manifestation of a huge problem of governance and administration that has hardly been addressed over the decades. Despite the fact that the conscience of the country gets aroused now and then when the kerosene mafia brutally murders honest officers, after a while, the public outcry dies down and we go back to our bad old chalta hai ways. It’s truly amazing that this country has still not been able to work out foolproof methods of checking adulteration of kerosene and the only solution to the problem that is offered is to increase prices.

Various taxes account for more than half the consumer price of petrol and over 30 per cent of the selling price of diesel. Over one-third of the price of petrol comprises excise and customs duties which accrue to the Union government. Excise duties on petroleum products contribute over 40 per cent of the Indian government’s total excise collections. Importantly, customs and excise duties on crude oil and petroleum products are a percentage of value, which implies that tax revenues go up as prices rise. But the government seems to care two hoots for the consumer or, for that matter, about controlling inflation.

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