It was with utter disbelief that the nation heard that from
Thursday, the 14th 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
