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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

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