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 15th Sept hike, in Pakistan it was the equivalent of
Indian Rupees 41.81 as on 23rd 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 8th
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 25th 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)
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