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Petrol on fire: myths and distortions
by Virendra Parekh on 23 Sep 2011 12 Comments

“Sonia Gandhi resurfaces in Delhi after a prolonged absence. By way of Munh dikhai, people of this country will have to shell out Rs. 3.14 extra for every litre of petrol,” said a popular relay SMS. The faint humour only served to sharpen the outrage underlying the message.


The outrage is wholly understandable. Pricing of petroleum products in India is a daylight robbery of citizens committed by their own government and justified with a number of myths and distortions. To rub it in, Planning Commission deputy chief Montek Singh Ahluwalia praised the latest hike as a step in the right direction.
 
 
Indians have the unenviable distinction of putting in their cars the costliest petrol in the world, barring some tiny and remote countries. Indian motorists now pay $3.95 per litre in terms of PPP (purchasing power parity) for every litre of petrol, which compares with $1.95 in China, $1.85 in UK and $0.76 in the US, not to mention 23 cents in Saudi Arabia and just 3 cents in Venezuela - both OPEC members. Even diesel prices in India, at $2.46 PPP, are way above other countries. 
 
 
It would be tempting to blame rapacious members of the Arab-dominated OPEC for the plight of Indian consumers. But that would be untrue, for OPEC has not cut production to jack up prices. Oil prices in international markets are driven by rampant speculation, respectably called futures trading. That speculation is fueled and funded by cheaply printed dollars meant to kick-start the US economy. As American economy remains moribund, the dollars in search of returns land in futures markets for oil, as also for gold. 
 
 
With this kind of prices, oil refiners must be minting money, one would think. Far from it. Poor chaps genuinely fear that they would go the Air India way unless the government matches its words with action. Mounting losses from selling diesel, kerosene and cooking gas at controlled prices and continued uncertainty over government support threaten to wreck their finances. Indian Oil, Bharat Petroleum and Hindustan Petroleum reported a combined loss of Rs. 9360 crore in the June 2011 quarter, and are facing another quarter of loss or marginal profit. They have
been raising petrol prices repeatedly, but the fuel accounts for a small fractions of their total sales, unlike diesel, which contributes 40 per cent of their sales volume. 
 
 
Revenue loss from selling diesel, kerosene and cooking gas at controlled prices is expected to soar to a record Rs. 121,000 crore in the current financial year. The government is considering asking the marketing companies to bear 10 per cent of this, while upstream producers (ONGC, GAIL and Oil India Limited-OIL) may bear about half of the total. The rest would be borne by the central government with oil bonds or cash. That is the famous oil subsidy burden that the finance minister and arm-chair economists never tire of talking about. But do not go by that misnomer.
 
 
The entire edifice of petroleum product prices is based on a series of politically correct myths and outright plunder. Petrol is touted as a rich man’s fuel while diesel is subsidised as the fuel for trucks and agricultural pumps. Petrol prices were hiked 12 times since June last year, diesel only twice; petrol is now costlier than diesel by around Rs. 20 a litre. 
 
 
Increasingly, however, it is the more expensive compact cars, not to mention sedans and SUVs, that offer diesel variants to enable buyers to benefit from the vast price differential between the two fuels. Motorbikes, scooters and small cars are the only vehicles now running only on petrol, leaving the middle class and lower class to bear the brunt. In other words, subsidy on diesel, meant for lorry owners and farmers, is happily consumed by millionaires driving slick SUVs. The huge subsidy on kerosene, the fuel that lights lamp and stove in the poor’s hut, has spawned a powerful oil mafia which has converted adulteration of other fuels into a highly profitable criminal enterprise. 
 
 
The phrase oil subsidy is a misnomer: around 35-45 per cent of the price we pay for petrol, diesel and other fuels is made of some tax or other. In other words, 40-45 per cent of fuel prices could be knocked off, even at current prices of crude oil and without paying any subsidy to oil refiners, if all government levies on oil and oil products were abolished. 
 
 
For 2010-11, the Central Government collected Rs. 135,433 crore from the petroleum sector as taxes, while state governments collected a cool Rs. 90,000 crore. In 2009-10, the corresponding figures were Rs. 111,779 crore and Rs 72,082 crore. From this, the central government pays a small part back to the oil marketers and calls it a subsidy. In fact, the tax structure is so fashioned that as crude oil becomes costlier, the tax burden becomes heavier. It is always a double whammy for the Indian consumer. 
 
 
Profligacy, greed and avarice of governments at the centre and in the states are responsible for the high cost of fuels and all the ills associated with it. A reduction in taxes on petroleum goods can enable oil companies to fully absorb a further rise in the oil import bill and obviate the need for fuel price hike. But any duty cut will send the government’s carefully crafted fiscal consolidation strategy into a tailspin. 
 
 
To make fuel cheap, we need a drastic contraction in government expenditure. This can be achieved by closing a large number of ministries handling economic and social affairs, which guzzle cash but contribute little to public welfare, which virtually function as large funnels to siphon public funds into private coffers. Even if the officials working in these ministries are paid gratis till they are absorbed elsewhere, it would still work out to the advantage of the people of India. It would be a veritable social-political revolution in the country.  
 
 
Going ahead, India must bring all petroleum products under the proposed Goods and Service Tax. This will automatically moderate the taxes that can be levied on them and stop the unconscionable
daylight official robbery that consumers are subjected to daily. This should be accompanied by a total decontrol of prices, so oil subsidy becomes a matter of past, both for the government and the oil companies.
 
 
In the medium term, the public policy should be consciously geared to substitute electricity for oil energy wherever possible. Thus, there has to be a stepped-up effort to run rural pumps on electricity rather than diesel. This will need political courage to stamp out power theft, invest in transmission and distribution networks as required, and free up coal mining. India should also take advantage of the global doubling of natural gas reserves, thanks to shale gas, by investing in LNG terminals and pipeline networks. The railways should seek to substitute power for diesel in traction. More importantly, railways should lure more traffic away from diesel-driven road transport. Blending ethanol into petrol is another measure that should kick in without delay. 



The author is Executive Editor, Corporate India, and lives in Mumbai

User Comments Post a Comment
I don't know what has "surfacing" of Sonia to do with the gas price hike,it is a universal phenomenon now a days,every where the gas prices are sky rocketing.I think writer just want to malign Sonia at what ever opportunity is available.
observer
September 23, 2011
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Where did the Italian Mafiosi disappear? To sort out her Swiss bank accounts? As a member of the Parliament, traveling at public expense, she need to answer this,owns us an explanation.
Rama
September 23, 2011
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Observer should read the article before rushing in to comment. The article is about pricing of petroleum products, especially petrol, in India and not about Sonia. And yes, considering what Sonia and her minions have done to this country and are still doing, we have a right to go hammer and tongs at her at every opportunity. The writer disdains to hide his dislike of Sonia. Any objection?
Virendra Parekh
September 23, 2011
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The immediate provocation is the steep depreciation of the rupee against the dollar from Rs. 44.1 in early August to Rs. 47.60 last week and Rs. 49.90 today. That pushes up the landed cost of imported oil. We import about 70 per cent of our oil requirements. Re. is down because of euro. As debt crisis in Eurozone worsens (i.e. threatens to spread to countries other than Greece, beginning with Italy), euro weakens against dollar. In times of uncertainties, global cpaital rushes to dollar as a safe heaven, however irrational it may seem in view of the present state of the US economy. As dollar hardens, rupee falls for no fault of its own. As euro crisis is not amenable to quick fix solutions, the weakness of euro and therefore of the rupee is likely to stay with us for some time.
Shirish Mehta
September 23, 2011
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\\\\\\\The writer disdains to hide his dislike of Sonia. Any objection?\\\\\\\
The writer altogether misses the point that whereas the writer is a Hindusthani who has reasons enough to suspect even unsuspecting movements of foreign threats to Hindusthan, jenab observer cherishes every misfortune of Hindusthan. thats it. If the trend continue, there would be no surprise if the price of petrol increase but there can be increases in price of bottled water which can compete with the increase in price of petrol. there can be no limit to the ways of mafiosos.
krishnakumar
September 23, 2011
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V.P, your comment ..................................."The writer disdains to hide his dislike of Sonia. Any objection?"................... says it all,i rest my case!
observer
September 23, 2011
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k.k, it is a matter of fact that it is the readers here (at least most of them) on this forum that "cherish" any misfortune of the "other" sides of border,you tell me when i did that (that is to "cherish" Hindustan's misfortune)?
observer
September 23, 2011
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Only redeeming feature of these price rises is,it takes us a shed farther from this addiction.
You are right about luxury diesel cars.While UPA II is shamelessly avoiding taxing these rich segments,what is happening to our so called CSR? Mr Tata,Mr Mahindra,Mr Bhargav.. are you listening? If govt does not tax luxury diesel car segment,corporates should come forward and tell the govt to do so.What is the big idea of scearming in support of Anna?
Kerosene for the poor is another myth.It does not reach the real poor in the cities.Real poor in the villages don't need it.They use fuel wood and agro waste.For free.Kerosene subsidy is now entirely driven by the mafia.
You are right about electricity.Gujarat govt has brough down T & D losses to 18%.All India average is still a whopping 40%.If we can reduce these Transmission & Distriution [ T & D] losses to 20%, we will have no power cuts and farmers will get power for their pumps.
We have installed capacity of 150,000MW against pick demand of 125,000 MW.If we can achieve capacity utlization of 95% ,coupled with 15% T & D losses,we can replace gas stoves with electric stoves.
If we can expand and electrify our railway networks and then shift long distance goods transportation to railways,we may not need so much of diesel.
This knee jerk kinds in the govts and political parties have taken us this far.We need newer kinds to address these newer challenges.MMS,Monteksingh and others had their day under the sun.Enough.
Jitendra Desai
September 24, 2011
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Sorry to move away from the topic of the article. truth is always bitter. The hindu readers in the forum are forthright. At no point of time have they ever digested the so called forced cunning partition of Hindusthan. Their contention that it is in the DNA of Hindu culture which allow it naturally to accommodate any alien theology had been amply proved in history. Before ever the world know what is secularism, it is the land of Hindus and their culture allowed hunted parsis to live peacefully in Hindusthan and the same attitude continued when all over the world the community of jews were persecuted, It was only Hindusthan that the Hindu culture embraced them with love and permitted them to live amidst them and practice their religion peacefully. Even today, the Jews world over consider the Cochin Synagogue as one of the holiest of their shrines and cherish the warmth of Hindusthan. Assimilation in such a tolerant culture is not possible for imperial, intolerant and aggressive Abrahamic offshoots, aka Islam and Christianity. On the cunning political patronage of Colonial British and befooling Sri Gandhi who roared "vivisect me before you vivisect Bharat", the draculian forces under the leadership of Jinnah pierced Akhand Hindusthan and created the utopia, viz., "Pakisthan". The adherents of Hindu culture believed that this utopia aka Pakisthan is falsehood. And their hypothesis was but validated when the ugly utopia aka pakisthan was divided by creation of bangladesh. It is no secret that any Hindusthani rejoices when as a country, these utopias as a country fail because that amply prove that partition of Hindusthan is a farce. If jenab observer would like the readers to believe that all his encomiums against Hinduism and Hindusthan and unabashed intolerance demonstrated in the name of Islam is love for other religions, I am sorry, that I am unable to buy it.
krishnakumar
September 26, 2011
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This "cunning partition of Hindusthan" as you put it was a direct result of your Hindu "leaders".Mohammad Ali Jinnah was definitely responsible for the creation of Pakistan but the "division" was due to your own people,so stop blaming the stupidity of division on Muslims.Quaid e Azam only wanted a fair share of power for Muslims ,but your Nehru and Patel threw fits on that,so the result is in front of all to see.
observer
September 28, 2011
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Another important thing. At the time of partition, Hindus from Punjab, Singh, Balochisthan and NWFP migrated to Hindusthan out of majburi and Moslems from Hindusthan migrated to the newly created utopia thinking that they are going to their place of fantasy, aka dar-ul-uloom on their choice. Even people from as far places as Kerala chose to migrate to this utopia. And how this utopia is today and how those who have migrated to the utopia feel about this utopia and the partition can very well be explained by only by the words of those migrated. Jenab Altaf Hussain of Mohajir Quami Movement, has out of pain, and correctly slashed that "batwada beesvi sadi ki sab se badi bool hai". You would sure deny the fact but every country around the world see this utopia as the fountainhead of terrorism. The reactions of leadership of this utopia to the concerns of their alms giver aka US of A remind me of the proverb, "VinAsa kAle viparIta budhi". But unlike the Islamic teaching of dooming all else other than moslems to hell, my Hindu teaching ask me to pray for the well being of my Hindu and Moslem brothers living in the utopia, "Sab ko sanmati de bagwan".
krishnakumar
September 28, 2011
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You are living in a bubble K.K which will burst very soon,the "majburi" that you are talking about was created by your own "leaders",like i said earlier and i will repeat once again so that you might get it this time that "Mohammad Ali Jinnah was definitely responsible for the creation of Pakistan but the "division" was due to your own people,so stop blaming the stupidity of division on Muslims.Quaid e Azam only wanted a fair share of power for Muslims ,but your Nehru and Patel threw fits on that,so the result is in front of all to see."now coming to next point when you say that Islam is "dooming" or what not,could you explain that why your Hindu brothers/sisters are converting to Islam after each lecture of Brother Zakir Naik in India (it includes Brahmins too),how come we do not the the same trend in the reverse as you are claiming that " my Hindu teaching ask me to pray for the well being of my Hindu and Moslem brothers living in the utopia, "Sab ko sanmati de bagwan"."Any comments???
observer
September 28, 2011
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