Wanted: A transparent policy for petroleum pricing

It was with utter disbelief that the nation heard that from Thursday, the 14^th of Sept 2012, no household would be allowed more than six cylinders of cooking gas per year! This, many felt, was in line with the Planning Commission’s quixotic view, aired not long ago, that people consuming items worth more than Rs 32 per day in urban centres and Rs 26 in rural areas would be considered above the poverty line! People were at a loss to figure out what hit the country. It took considerable time for many to absorb the new reality and realize that extra cylinders could be bought at the market price without any subsidy.  

And this in effect meant a hefty hike in the gas budget for the housewife. For, if she bought six additional cylinders from the market at Rs 900 against the subsidized rate of Rs 399 (Delhi price), the extra outgo of cash would be Rs 3000 a year. And the average of the twelve cylinders taken together would come to Rs 650 per cylinder, an increase of Rs 250 over the subsidized price! And if she bought another six cylinders, the average price for the 18 cylinders would come to Rs 733 per cylinder. In this case the cylinder price is straightaway increased from Rs 399 to Rs 733.

Greatly more far-reaching are the implications of the seemingly nominal price increase for diesel. It went up by Rs 5 per litre. And inflation began at the source itself. State governments had their own taxes. The pump price (in Hyderabad) consequently increased by Rs 6.14 to Rs 51.17. Thus the first step towards inflation was initiated by the State tax. (The Centre’s duties are fixed per litre of petrol/diesel, not linked to its value.)

Diesel’s high inflation-potential makes its price variation a highly sensitive issue, both economically and politically. It is diesel that drives public transport system and freight transportation, both by road and rail. Even private cars are now increasingly turning from petrol to diesel. Truck operators who are never satisfied with their hire charges are now clamoring for a hefty hike disproportionate to the diesel price increase. Rail freight too is bound to go up. Consequently, prices of all goods, cereals, pulses, vegetables, meat, fish, egg, etc, will surely go up by leaps and bounds. Travel by bus and taxi would become more expensive. Students’ travel concessions would come under greater pressure. And the cascading impact of all these could be backbreaking for the common man.  A simple increment of Rs 5 in diesel price triggers disproportionately high inflation. And inflation, as they say, is a vicious kind of unseen tax.

The common man is bound to ask questions: What drove the Government to resort to such a politically suicidal measure, and that too coming as it did on the heels of the ‘coalgate’ scam that battered the monsoon session of the Parliament and shook the country? And why this sudden, unusually firm resolve on the Government’s side to so decisively dismiss the Opposition demand for a roll-back of these ‘reforms’ (including that of its permission to allow foreign direct investment in India’s retail market)? And what kind of solutions the economist-turned-politician Prime Minister has in view for arresting the huge inflation that is bound to follow? And the commoner who has been regularly treated in recent years to a wave of corruptions and scams of unprecedented magnitudes may even suspect if there is any element of corruption involved in this diesel-gas price enhancement too.

The economics of petroleum products

Now, to deal with these questions, a dispassionate look at the economic dimensions of the issue would be in order.

Cooking gas for domestic purpose is cheapest in India among the South Asian countries. A standard cylinder containing 14.2 kgs of gas is priced in Delhi at Rs 399. In Pakistan the same quantity of gas is sold to households at the equivalent of Indian Rupees (INR) 1095 and in Sri Lanka at INR 971. Even the open market price in India was lower at Rs 900 on 14 Sept (since reduced to Rs 800 consequent on reduction in tax and again put up by oil companies by a similar amount thus nullifying the benefit meant for the consumer).

Diesel, again, is cheapest in India even at the revised price: It costs Rs 46.95 per litre (Delhi), against Pakistan’s INR 65.01. The loss to Indian companies is estimated at Rs 14.56 per litre.

Kerosene is sold under the public distribution system in India at about Rs 32 per litre. (Pak price INR 59.82.) Oil companies in India lose Rs 34.34 per litre.

Also, it may be noted that petrol, diesel and kerosene are sold in many countries more or less at the same price, often diesel price being the higher.

Countries like India, China, Japan, USA, Canada, Europe and Australia depend on crude imports (more or less at the same price), and yet the prices of petrol and diesel at the pump level vary from country to country. In India they are sold cheaper than in most other countries except USA. According to a reliable source, petrol prices in some of these countries as on 27 Sept, converted into US Dollars, were as under;

USA: $ 1.07; India: $1.33; China: $1.43; Canada: $1.44; Australia: $1.54; Japan: $1.84; Great Britain: $2.18; Germany: $2.27

The difference lies in differing tax structures in those countries.

Tax Structure and subsidies in India

Oil and petroleum products attract Central duties (import/excise) and sales tax (state-level). Over the years, the central government has abolished the import duty on crude oil. Excise duty has been progressively reduced to its present levels of about Rs 9 for a litre of petrol (effective Sept 14, 2012) and Rs 4.65 for diesel. And, in the wake of political protests, the Government has now abolished the duties on non-subsidized gas thereby reducing its price from Rs 900 to Rs 800 (effective 22 Sept ’12). Soon after that the oil companies raised the price of gas by about Rs 100 per cylinder, thereby taking away the benefit meant for the consumer!

However, the State taxes have been on the rise. Andhra Pradesh has the highest tax regime (33% of the value). Until recently, oil companies used to contribute more to the central exchequer than to the states. However, of late, the taxes levied by the states have progressively increased while the central taxes have progressively decreased. For instance, the Indian Oil Corporation (IOC), the largest oil marketing company in the country catering to about half of the domestic market contributed Rs 49050 crores to the state exchequer by way of sales tax in 2011-12, while its contribution to central government (other than dividend etc) was half of that at Rs 24456 crores.

Subsidies

The losses on account of subsidized selling are being compensated by a consortium consisting of the Central government and central-sector crude producing companies (ONGC, Oil India, Gail etc). State governments are conspicuously absent in this subsidy consortium. So, whenever there is a price rise, the consumer is unhappy, the Central Government is politically unhappy with self-imposed embarrassment, but the State governments are delighted because they stand to gain by way of incremental sales tax! State governments often condemn the price hikes while, at the same time, are unwilling to forgo their incremental taxes! You would call it hypocrisy?

Thus, IOC’s last year’s losses were covered by a total subsidy from Central Government consortium amounting to Rs 77267 crores. After deducting the excise duty collected by the central government (Rs 24456 cr), the net amount of central support to IOC alone came to Rs 52811 crores. Similar was the case with the other two oil marketing companies too, namely BPCL and HPCL. According to one report, the total subsidy burden on the government during last year on account of petroleum products alone, at least on paper, was about a staggering Rs1,90,000 crores!

And even after reckoning this huge subsidy, the profit earned by IOC last year was less than one percent of its sales turnover!

All the Indian oil marketing companies (IOC, BPCL and HPCL) are working to the international standards of efficiency, and not even their enemies would accuse them of sub-optimal performance.

Current outlook

Last year the price of crude oil rose by about 32 percent (average) in the international market and the rupee depreciated by 16 percent (average). The combined effect of these on Indian oil marketing companies was about 42 percent. Hence, in an open market, the refined products (petrol, diesel, gas and kerosene) should be dearer by 40-45 percent. With such hefty increases in the production cost it would be difficult for any government to go on shouldering the price line by extending further subsidies. Current year’s outlook is worse, the rupee having slid down further.

Possible solution

In the circumstances, it is time the State Governments started sharing the burden. In fact Central Govt had taken up the matter with the States a few months ago. Response has been slow. One State, namely Goa, has responded by making a hefty reduction in their VAT on petrol. As a result, petrol price in Goa has come down to Rs 56.99, against Hyderabad’s Rs 75.42.

And recently, heeding to Central Government’s suggestion, some of the States including the NDA-ruled Bihar and HP, have reportedly agreed to bear the subsidy on some additional cylinders of gas. It is hoped that the States would increasingly realize the situation and progressively reduce their ST/VAT in order to keep the prices under check. The question how they could meet their consequent fiscal deficits is a matter they should sort out with their economic genius and political acumen.

Political acceptance of the reforms

So, the recent hike may appear to be economically justified although, politically, it was a blunder. Any reform, howsoever much needed, should be implemented with a human face. Otherwise, no government can aspire to move forward. In democracies, governments cannot comfortably implement even the soundest of policies unless they make sense to the people. The Parliament and the Opposition are meant to debate policy issues, their economic soundness and their action plans, instead of stultifying such debates and obfuscating the issues by politicizing the subject and paralyzing the functioning of the Parliament. The present tragedy is that most of our politicians cutting across all parties are equally confused about the fuel pricing mechanism. And if some of them know better, they deliberately confuse the public in order to score brownie points over the ruling party, as amply evidenced in TV debates. When Opposition MPs taunt the Central Government for ‘deceiving’ the nation by levying duties ‘far surpassing’ the subsidies, the MPs of the ruling parties are unable to disabuse the viewers of the Opposition propaganda by bringing out the facts of the case including the havoc played by State-taxes.

In the circumstances, the Government would be well advised to come out with an educative White Paper spelling out the policy and its implications. It may help clear the present confusion and may facilitate building a national consensus on the subject.

K X M John

28 Sept 2012

Women’s contribution to nation’s wealth

The Metro Women’s Club in the City recently celebrated its silver jubilee on a grand scale. Dignitaries who graced the occasion and shared their thoughts ranged from academicians and socio-cultural leaders to professionals, lawyers and politicians.

The keynote address at the inaugural session was delivered by the Delhi-based Professor Damayanti Verma. The other key speakers at the session included the popular Malayalam novelist Parmesh Kurup, the World Bank’s Dr. Usha Menon and the much respected patriarchal figure Justice Ramanatha Ayyar.

Speeches in a nutshell

Professor Verma’s emphasis was on the enormous contribution women were making in their daily life and went on to emphasize its measurable impact on the country’s economy even surpassing that of the male contribution.

Parmesh Kurup strongly endorsed her views, and lamented that woman’s roles as wife and as mother were not getting due appreciation.

Dr Usha Menon, while agreeing with Professor Verma’s contentions in principle, expressed difficulty in translating women’s contribution in the family into measurable economic terms. That was because the woman’s contribution in the family transcended mere economics. The banker went on to assert that any attempt at converting her services into financial terms would have the counter-productive effect of debasing her.

Retired Justice Ramanatha Ayyar was not exactly amused by the hijacking of the basic feminist theme of the day in the direction of crude economics. He regretted that the discussions they had in the day were limited to women’s contributions in financial terms. He reminded the gathering about the contribution of feminism of the past one century and exhorted women to continue the fight for their social, economic and political rights.

The speakers presented their thoughts roughly on the following lines.

I. Prof Damayanti Verma

Prof Verma began by tracing the history of feminist struggles over the past one hundred odd years and how women could win some of their legitimate rights to equality with men in family life, in economic spheres, in the society and in politics. She said what the movement could achieve was great indeed, but what was yet to be achieved was greatly more. Especially so in politics.

“Take, for instance, the case of USA. Their Senate was established in the 18^th century, yet the first time a woman found a place in that body was in 1922. Even by 1992, there were just three women Senators in USA. Now they have seventeen, out of a total of 100. In India the Women’s Reservation Bill has been pending since 1996 although the Rajya Sabha had passed it a couple of years ago. Women’s present strength in the Lok Sabha is just around 60 out of the total of 545, forming but 11 percent of the total. And you know the unkind comments heard in the Parliament from its male members when the Bill was taken up for consideration.”

The Professor said the subject was vast and the issues complex. Hence she said she would limit her present discussion to the contribution women were continually making to their country’s economic output or GDP. She briefly enumerated the various kinds of domestic tasks a woman is required to do in a middle class Indian family, and said, “The thankless chores that women do at home, if rendered in economic terms, would lift the country’s gross domestic product to unimaginable heights, and men folk would be forced to sit up and recognise women’s worth in the family set-up as also at the national level.”

She went on, “Women cook; they clean; they wash; they nurse, they teach and enculturate children; they tidy up the house; they keep family accounts; they are the relationship managers who maintain and nurture the family’s social network; and they do many other innumerable services for the family. They work with no prescribed time limit, without ever taking leave, and without any personal profit motive. In the case of a ‘working woman’, her domestic contribution would be over and above her income from job and work schedule.”

Damayanti Verma, once a respected economics professor and now a well known social activist in the country, was the chief guest at the function. Critics would comment later that there was nothing new in her speech; the idea had already received much attention at various forums. Yet, they conceded, she presented the case in a convincing manner unlike some of the fanatic feminists who would confuse the issue and create an adversarial mood by ventilating their domestic grievances on such occasions. 

Verma continued, “Economists all over the world concede that such value-added GDP would be a fair indicator of the nation’s real income generation. And, if this is done, women’s share in such a refined GDP would far surpass that of the male contribution.”

Prof Verma received loud applause in response.

“Wait a minute”, she said. “I specifically mentioned here only those services rendered by women that are visible and quantifiable. There are many other, even more valuable inputs from women, which go into the family-building process, into the nation-building process, without ever being noticed. Who, for instance, makes it possible for the man to do great things and contribute to the nation? When you say there is a great lady behind the success of every great man, do you think it is but some kind of platitude? Likewise, when you say, there is a great mother behind every successful child?”

“Take the legendary case of John and Jacqueline Kennedy. It is well known that he was he because of her. So, didn’t she merit part of the credit that was attributed to him? How would you compute her share in their contribution to the overall development of America? Assume, for the sake of argument, he had a shrew as his wife? Would he have been an effective President in that case?”

The Professor was on a roll.  “Let me illustrate the point from the difference between a good industrial entrepreneur and a bad one. A good entrepreneur brings prosperity to her enterprise, while a bad one does not. And how do you evaluate their respective entrepreneurial contributions? Difficult. Likewise, it is difficult to delineate the effect of a woman on the success of her man, although her influence is there for all to see.”

Prof Damayanti continued, “To summarize, it is possible to evolve norms to compute the contribution of women in the building up of the country’s GDP; and yet there are also intangible contributions from her that defy such computation. And, based on the tangible, quantifiable contributions alone, I am sure the female contribution so worked out, will far exceed the male contribution. Men need to sit up and take notice of this.”

She went on reasoning out the need for the world to change the gender paradigm and the gender bias, and to give the woman her due place in the society.

The applauses that followed were wide yet mixed with a few tentative ones.

II. Novelist Parmesh Kurup

The award-winning novelist Parmesh Kurup spoke next. Wholly endorsing the views expressed by the economist Damayanti Verma, he, however, admitted that he was rather illiterate in the technical aspects of economics; that his familiarity with concepts like GDP was befitting that of a layperson; and that hence he would not be able to go into the wider implications of the propositions made by the Professor.

“But I guess I have understood the import of what she said. There are many things that women do to make life beautiful – beautiful for her husband, for her children, for her wider family and for the society itself. It is a pity that their contribution to the welfare of the community often goes unrecognized.”

The novelist continued, “As Prof Damayanti rightly observed, most of our noteworthy citizens, be they politicians, social/cultural leaders, artists, industry leaders or executives, are shining in their fields because of the support they are receiving at home. Hence it is fair that a large share of the credit should go for their hidden support. I don’t know how the economists would convert such support services into money terms. Impossible I would say. I shall illustrate this point with an episode I have described in my upcoming novel....”

“Vasant, the company’s MD, rated his own public relations skill as a prime factor in his success. He would invite influential persons and high net worth individuals home for drinks. His wife was an excellent cook. The man would display her culinary skills before the guests, and she would be present throughout the treat as a good hostess. With effort the lady would go on playing the role and smiling even when her facial muscles were aching. And this was a regular chore for her. His boss the Chairman was a keen observer of men and matters. He indirectly admonished him for overdoing his public relations gimmicks and added that more than half his salary should go to his wife. ‘Would you at least acknowledge your debt to her?’ asked the Chairman. ‘But, Sir, that is her duty’, was his response!”

The novelist continued, “I read a story some time ago. A real story. It happened some 200 years ago. A rich man had as many as 25 children, all living at the same time. The local Raja took notice of this rare feat and honoured him with an award, a veera shrinkhala, hero’s necklace. No one then even thought of the prolific mother who was the one that made it possible for the couple to have so many healthy children. Her role was taken for granted. In reality, was it not she who merited the award more than him?”

Someone among the audience was heard commenting that if men were to speak at women’s functions such as the present one, they would overnight become more female in their outlook than the females themselves and go overboard and support women above and beyond their own expectations!

III. Dr Usha Menon of the World Bank

Dr. Menon spoke next. After serving the World Bank for several years, she had turned to social activities and occasional writing. Endorsing the views expressed by Prof Verma, she said a modified or refined GDP as suggested by the Professor made very good economic sense. She explained the concept of the economic rate of return (ERR) as followed by the World Bank. “Attribute a universally acceptable value or norm or weight to each ingredient in the manufacture of a product and work out the notional cost of the product on that basis. That would be the ‘real’ cost of production, including all hidden costs. And compare it with the product’s international price. If the profit margin as a percentage of the sale price is comparatively sizable and acceptable, we say the economic rate of return is OK.”

She explained the significance of the ERR. “Enterprises in closed economies often earn crude profits by exploiting the labour and by buying raw materials and other inputs at subsidised prices. They earn profits; but their profits are artificially created, being the result of labour exploitation and subsidies from the public exchequer. Now, you replace the labour cost with the internationally acceptable cost and withdraw the subsidies. You get loss. That means the venture was artificially propped up, and its ERR was negative.”

 “The question raised by Professor Verma is if we can, likewise, attach a weight to each domestic function and compute the economic value of the function. Does it appeal to you as possible? Yes.... ?”

There was a subdued expression of doubtful approval.

She resumed, “Technically it is possible to compute notional values for some of the elementary contributions made by a housewife. For instance, let us take the humble task of cooking rice. There is market value for a kilogram of uncooked rice, and there could be a standard market value for the same amount of the same quality of rice cooked. The difference is the value added. Deduct from it the cost of fuel and other expenses for cooking. Now you get the cook’s contribution. Would you consider that meagre surplus as the contribution of the woman? You might as well consider the cost of hiring a cook as the equivalent of the lady’s contribution in money terms? The unsavoury paradox emerging from the latter view is that the services of the lady of the house could be exchanged with those of a maid working for money! In other words, the housewife’s services become convertible or ‘tradable’ in the language of the economist.”

A murmur of groan was heard from among the audience.

Usha Menon continued, “Yes, one way to quantify the woman’s contribution is to trivialize her family building efforts as a series of unconnected, distinct items of chores and evaluate each such component separately. But, as Professor Verma herself suggested a little while ago, the function of the lady of the house could be better understood holistically as entrepreneurial and not as that of a maid mechanically going through her drudgery. Viewed from this entrepreneurial perspective, it follows that the value of her aggregate services in the family would be enormously greater than the total of the values of her disaggregated, routine functions. The value of the whole exceeding the sum of the values of its parts. Also, holistically considered, the quality of such services would vary from individual to individual. Hence it becomes difficult to evaluate the varying contributions of such domestic entrepreneurs and put a price tag on each of them.”

“Thus”, she concluded, “we come to the inevitable conclusion that the financially convertible contributions of the woman are much less significant compared to her overall, non-convertible contribution to the family’s growth, prosperity and well being. Once this basic reality is recognized and appreciated, the consequential question to be addressed is: Would it be of any practical benefit to anyone if the concept of GDP is ‘refined’ by adding the convertible domestic contribution of the woman as part of the nation’s income? Some of our friends here may fancy that such modified GDP emphasizing women’s contribution to the nation’s income may give them some kind of psychological comfort. Another view, an opposite one, could be that, by doing so we are automatically trivializing the woman’s role in the family by laying the emphasis on her routine, tradable contributions and ignoring her much greater, superior role in the family.....”

Usha Menon thus projected herself as agreeing with Professor Verma in principle but disagreeing in essence. Ms Menon’s address received muted appreciation from among the audience, maybe because it went over their head.

IV. Justice Ramanatha Ayyar

It was now the turn of the much respected patriarchal figure, retired Justice K. Ramanatha Ayyar. He began by appreciating the thoughts expressed by the previous speakers, all of whom obviously stood for women’s rights, their equality with men in political, economic and social spheres. It was that noble concern that made Professor Verma emphasize the need for remodelling the country’s GDP by integrating into it women’s domestic contributions in financial terms. The self-same sentiment found expression through respected novelist Parmesh Nair. And that very concern was addressed by banking expert Dr Usha Menon in her highly professional way.

He said, “Ms. Menon in fact went a step further. She neatly explained to us the near-impossibility of converting a woman’s contribution to her family, a wife’s contribution to her husband, a mother’s contribution to her children, into mere financial terms. And if you would permit me to paraphrase her thoughts in my own words, she said a woman’s contribution to her family transcended material considerations, and hence it would be impossible to measure her by the yardsticks of mechanical economics. To borrow a phrase from the 19^th century philosopher John Stuart Mill, the place of the woman in the family is not merely that of an ‘homo economicus’ or economic person. You cannot define, or narrow down, men and women in mere economic terms...”

Justice Ayyar continued, “How can you evaluate mother’s love in limited money terms? What kind of finite value you would assign to mother’s milk?”

“Therefore, ladies and gentlemen, let us not even think in terms of measuring the woman of the human species in economic terms, as logically reasoned by Ms Menon. And if we do, then that would tantamount to degenerating and debasing the wife in the woman, the mother in the woman. In the name of emancipating the woman we would be doing much harm to the dignity of womanhood, albeit unwittingly.”

“Let our feminists also understand and appreciate that men too bring in many collateral benefits into the family in addition to monetary income. They too are entrepreneurial in their respective families, consciously and unconsciously, in myriad ways. Often it is they who build up the family prestige. It is they who have a major role in instilling self-confidence in their children. When he advances in his career, the family will have the spin-off benefit in the form of enhanced prestige in the community. I don’t want to enumerate here all the benefits accruing from a father, but let me briefly state that the man and the woman have their respective roles, complementary roles, in the family, in its upbringing.”

“Then the immediate question that stares at us is: Why good many women in their family life are increasingly getting dissatisfied with their domestic role? And, by way of an answer, most of us would point their finger at the man. You would accuse him for taking her for granted. As he gets increasingly involved in his profession, there develops some kind of disconnect in the family. Communication becomes less open. And it affects the family’s cohesion. Dissatisfaction follows. But I am not here to share my thoughts on family chemistry or family dynamics....”

The Justice continued, “The theme assigned to me, my contextual concern, is women’s equal rights in the society. But, during the day’s discussion, the theme got narrowed down to the subject of manipulating GDP, the session itself having been hijacked in that direction, unwittingly though....”

“I was to discuss with you here the issue of equal rights for you in society, economics, politics and in workplace. But at this stage in the session I would not redirect it towards my assigned theme since the allotted time has already been used up for GDP considerations. So, all I want to say now is this - You should continue to systematically fight for your rights. Remember: it is due to the unrelenting fights launched by the feminist movements of the last century that you are now enjoying the benefits of universal suffrage in politics....

“I am not in any way discouraging any discussion of GDP and women’s share in it in seminars and workshops like this. On the contrary I believe that such discussions are useful in keeping the controversy, the issue alive. At the same time, such discussions suffer from several disadvantages.... “

“First, it deflects our attention from the main issue. Secondly such discussions can result in scoring self-goals: the role of the dignified woman in the family gets reduced to a mere financial function, as if tradable with that of a maid working for money as Dr Menon said. Thirdly, good many of our female activists – Professor Damayanti Verma certainly excluded - often present their case wrapped in such obsessively adversarial spirit as if they were bent upon drawing but derision from men. By the way, that is what happened in Parliament when the Women’s Bill was taken up. Interestingly, most men have come to expect some flippancy in women’s demands especially when they state their case with their characteristic impetuosity.”

Therefore, let me conclude, my dear delightful lady friends, by exhorting you to make some efforts and study and understand the real problems facing women in the present-day India. And fight to redeem yourselves from the inequities that are still there in the society concerning you. Eventually you will win, because you are the mothers to our decision-makers. And I wish you all success.”

The applause from the audience was loud and spontaneous.

The Secretary of the Club, Ms. Molly Varghese expressed her great satisfaction over the thoughts that evolved at the session and thanked all the speakers and the audience for contributing to the memorable and meaningful session.

K X M John

23/04/2012

India's Oil Pricing Policy: Neither Good Economics nor Good Politics

22/10/2011

Going by the high-frequency hikes in petrol prices of late for reasons that go over the head of the common man, can anyone confidently dismiss the possibility of yet another abrupt hike one of these midnights? It may be recalled that there were as many as ten petro price hikes during the 12 months ended Sept 2011, five major ones and five in the nature of adjustments. On an average it meant one hike in 37 days!

Temptations for further hikes

Straws are increasingly appearing in the wind these days, floated apparently by interested parties, about the financial woes that await the Oil Marketing Companies (OMCs) in the wake of the increased volatility in the international crude oil prices and the recent weakening of the rupee against the US Dollar (from Rs 46 to Rs 49). And it might be tempting for the Government to take it good economics to hike the prices of petro-products whenever the rupee cost of imported crude oil increases, lest the consequent loss of revenue to OMCs would eventually fall upon by the Government. Prima facie, such price hikes might appeal as simple, straightforward arithmetical response to the situation, but certainly they don’t come as sound macro economics or sound politics. For, when petro prices increase by one unit, the consequential multiplier effect upon every other economic sphere will add up to several units, thereby raising inflation and upsetting the economic equilibrium of the common man’s daily rhythm, apart from shaking his confidence in the system itself and inflaming his resentment against the Government.

Petrol cheaper in USA, China and Pakistan

The bewilderment of today’s informed public is further compounded when he learns that the prices of petrol in such crude-importing countries as USA, China and Pakistan are much less, at about 50 to 60 percent of the price now levied in India. For instance, while the petrol price in Bengaluru is Rs 74.82 effective after the 15^th Sept hike, in Pakistan it was the equivalent of Indian Rupees 41.81 as on 23^rd Aug as stated in India’s Rajya Sabha by the Minister of State for Petroleum. China had reportedly reduced their petrol price by 3.5 percent and diesel price by 3.9 percent effective from 8^th Oct 2011.

So, what makes Indian petrol expensive?

Obviously, petrol is sold at a much higher price in India. If the Central excise duty (Rs 14.35 per litre of petrol) and state taxes (varying from 15% in Pondicherry to 31% in Karnataka) are removed, its pre-tax, pre-duty price (i.e., the realization to oil companies) would come down to about Rs 43 per litre. But this itself is higher than the Pak retail price which includes their own duties and taxes. This means that, leave aside duties and taxes, still there is a huge “over-recovery” in the sale of petrol in India (contrary to oft-repeated governmental claims), just as there are “under-recoveries” in the sales of kerosene and LPG.

Petrol boosts oil companies’ profits

Let us look into the profitability structure of India’s public sector OMCs. Take, for instance, the annual report of the Indian Oil Corporation, the largest oil company in India. During 2010-11, the company’s sales turnover was Rs 328,744 crores (covering diverse petro-products such as petrol, diesel, kerosene, LPG, naphtha etc). Based on this, IOC contributed Rs 39,658 crores to the Central exchequer by way of duties and taxes. The states benefited to the extent of Rs 37,964 crores by way of sales taxes and local taxes.

IOC also received from Central Government subsidies and grants that year aggregating Rs 24,281 crores to cover part of the under-recoveries from the sale of kerosene, LPG and diesel. And it is claimed that the remainder of the losses on the sale of these items were absorbed by the company. The amount of loss thus absorbed by the company has not been disclosed in the Annual Report.

And even after absorbing the loss, the company had a gross profit of Rs 16,336 crores during the year.

It is clear, therefore, that the higher petrol prices go (1) to fatten the Central and state exchequers and (2) to cross subsidise part of the under-recoveries in the sale of politically sensitive products, leaving reasonably good profits for the company. Hence, viewed from any angle, the claim being propagated by interested parties that petrol is sold in India at a loss to the Oil Marketing Companies is unsustainable.

Recent price hikes enough to cover crude price increase

Petrol price went up by over 22 percent last year (2010-11) through as many as nine revisions. Since the hikes were effected on dates widely spread over the year, the additional benefit to the Oil companies accruing from those hikes during that year could be about 10 to 12 percent on an average. Full benefit (22 percent) from the hikes of that year would surely accrue to the companies during current year. In addition they would gain from the three hikes already effected this year, which have together taken the current petrol price by another 13 percent. So, even if we assume there would be no further price hike during the remainder of the current financial year, the average selling price of petrol this year would be some 25 percent over the average price of last year (2010-11).

Also, the LPG price was enhanced by Rs 35 last year and by another Rs 50 this year (in June 2011) exclusive of state levies. Kerosene prices too have been enhanced simultaneously, by Rs 3 per litre first and by another Rs 2 in June.

Therefore, one may reasonably expect a handsome increase in the financial turnover of oil companies this year based on the price increases already effected.

However, imported crude to cost more this year

According to BPCL Annual Report, the superior Brent crude price averaged US Dollar 86.73 per barrel last year, and the average is expected to rise to US$ 110 this year, an increase of 27 percent. It may be mentioned, however, that the Indian basket of imported crude includes Brent and cheaper brands also. Hence the average import price could be expected to be lower, although marginally. Of course, the rupee has weakened recently, and the rupee cost of crude imports has consequently gone up.

Indian Crude output to be reckoned

At the same time, it may be kept in view that as much as 25 percent of the consumption of crude in India in 2010-11 had come from indigenous sources like ONGC, whose cost of production of crude is unaffected by the volatility in the international market. So, they need not charge import parity prices on the crude supplied by them to Indian refineries. In fact they seem to have adopted the accounting practice of supplying their crude to Indian companies at the ruling international price, but with a “discount”. Hence, with the inclusion of the cheaper ONGC crude, the average price of Indian crude basket may not go beyond the level of US $ 110.

 Other mitigating developments

The Government has abolished the 5 percent customs duty on crude oil imports effective from 25^th June this year, thereby making imports cheaper to that extent. Export of petroleum products is also increasing, thus checking part of the ill effects of a weakening rupee. Last year’s import of crude cost the country US $ 99 billion, while net exports of petro products fetched forex of about US $ 28 billion.

Restraint needed

All considered, the price increases on petrol, diesel, kerosene and LPG already effected in recent times may be good enough to take care of the impact of crude price hike in rupee terms this year. And the Government may not get unduly perturbed so long as crude prices further fluctuate and the rupee weakens within reasonable bounds for the time being. The Government should be prepared to shoulder marginal increases in subsidy if needed.

However, it is time now to consider drastic long term measures to freeze the retail prices of all the sensitive products including petrol for some time. Such long term measures could include progressive restructuring of state-level taxes as well. A ceiling of 20 percent on VAT and abolition of entry taxes could be considered. Fiscal deficits, if any, arising from such self-restraint may need to be managed through other sources.

In short, Government may need to adopt a practical approach, by striking a golden mean between good economics and good politics.

K X M John

22/10/2011


(This article was published in the New Indian Express on 23/10/2011)