That Oily Feel

Why has the government decided to hike fuel prices at a time when global crude prices are absolutely stable?

The new fuel prices are displayed at an Indian Oil Corp gas station in New Delhi. PANKAJ NANGIA / BLOOMBERG VIA GETTY IMAGES
01 August, 2010

THE GOVERNMENT OF INDIA swears in the name of the proverbial aam admi—the ordinary people. Its actions, however, not merely benefit the khaas admi—the select few—but also, in fact, contribute to the further immiseration of the underprivileged. This is aptly illustrated by the manner in which the second United Progressive Alliance (UPA) government suddenly decided on 25 June to hike the prices of petrol, diesel, kerosene and cooking gas, the most widely-used petroleum products in the country.

The country’s rulers and policymakers believe that it is their right to take away with one hand (through imposts) what they give with the other (subsidies). Even not-so-benevolent dictators believed that their right to tax rich citizens and provide doles to the poor would not just have to be seen as fair but also tilted in favour of the less well-off sections. What the Manmohan Singh regime has done is exactly the opposite, all in the name of ‘market-friendly’ economic reforms. Here’s why.

The day the Cabinet Committee on Economic Affairs decided to ‘decontrol’ petrol prices and increase the ‘controlled’ prices of the politically-sensitive and subsidised diesel, kerosene and liquefied petroleum gas (LPG, used mainly for cooking), the prime minister flew off to Toronto for the G20 meeting of heads-of-state. Considered a world-renowned economist, Manmohan Singh was reportedly heard with rapt attention as he spoke on correctives to the “fragile” state of the world economy and the “uneven” prospects of post-recession revival.

Returning to New Delhi, he told journalists travelling with him on his special aircraft, “People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making… The subsidies on petroleum have reached a level which is not connected to sound financial management of our economy. So, this decision has been taken to put some burden on the common people, but it is manageable.”

Even as he added that after petrol, diesel prices would soon be freed from administrative control, Petroleum Minister Murli Deora calculated that an average consumer would now pay less than one rupee a day for cooking gas while kerosene users would shell out 26-27 paise extra each day—assuming that they would get it at the correct price of around 12.5 rupees a litre, which is 15 rupees a litre lower than the putative “market-determined” price. The price of kerosene was last hiked in March 2002 to around 9.3 rupees a litre, up from 2.5 rupees a litre fixed in January 1998. As for LPG, without the subsidy each cylinder would cost 225 rupees more (calculated after the recent price hike of 35 rupees per cylinder).

Deora has conceded that around 40 percent of the publicly distributed kerosene is used to adulterate petrol and diesel or smuggled into neighbouring countries. For decades now, kerosene distributed by state governments has not reached the needy; nor has it been used for cooking and lighting to an extent that it would appreciably curb the use of wood. Moreover, contrary to official claims, the price differential between kerosene and petrol/diesel remains significant enough to ensure the rampant misuse and misappropriation of kerosene.

The government’s attempts to curb adulteration by colouring kerosene blue and lacing it with chemical markers have been ineffective. (Few today remember Shanmughan Manjunath, the idealistic graduate from the Indian Institute of Management, Lucknow, who had worked with the public sector Indian Oil Corporation. He had ordered the sealing of two petrol pumps at Lakhimpur Kheri in Uttar Pradesh for three months for selling adulterated fuel. His bullet-riddled body was found on 22 November 2005, three days after he conducted a surprise raid on these retail outlets. The owner of the pumps, his employees and accomplices were later arrested.)

To be fair, ensuring that subsidies benefit those who need them the most is easier said than done. Oil companies are trying, with some success, to ensure that LPG cylinders coloured red are not used by commercial users. The 14 million petrol-driven passenger cars in India are primarily used by the relatively affluent, but not the 80 million scooters and motorcycles, most of which also use petrol. An estimated four million trucks and buses and the Indian Railways together consume nearly two-thirds of the diesel in the country. About 20 percent of the diesel is used by farmers to pump water and run tractors. The remaining 15-odd percent goes to the owners of fancy cars and electricity generators used to run air-conditioners in offices and brightly lit shopping malls.

Few believe the government’s defence, as claimed by Kaushik Basu, Chief Economic Adviser to the Government of India in the Ministry of Finance, that the rise in petroleum product prices will add to inflation by less than one percent. The simple truth, though, is that while transport accounts for around five percent of the total cost of most products and diesel comprises one-third of total transportation costs, even a marginally higher diesel price has a cascading impact on the prices of a wide range of products, particularly food, as retailers see advantage and disproportionately increase the prices. If transport costs go up by, say, one percent, the price of tomatoes could go up by two to three percent, or even more.

What the government does not publicise is that taxes comprise more than half the price of petrol and around 30 percent of the price of diesel. Roughly 37 percent of the selling price of petrol is excise and customs duties, which accrue to the Union government. (In fact, excise duties from petroleum products contribute 45 percent of the Indian government’s total excise collections.) In contrast, total taxes on petrol are 37 percent in Sri Lanka, 30 percent in Pakistan and 24 percent in Thailand, while taxes on diesel in these countries are less than 20 percent.

There are two other facts that remain insufficiently publicised. First, the recent price hike will enable private retailers like Reliance Industries to reopen franchised petrol pumps that had been lying closed since 2008. Second, although the government claims that “under-recoveries” of oil companies have mounted to unsustainable levels, going by the annual report of the Union Ministry of Petroleum & Natural Gas, the audited balance sheets of our maharatna public sector oil companies (like IOC, Hindustan Petroleum and Bharat Petroleum) appear to be in good health.

In April 2002, the Atal Bihari Vajpayee government had declared that it would dismantle the “administered pricing mechanism” for petroleum products and let oil companies decide what prices to charge consumers. However, then Petroleum Minister, Ram Naik, refused to cede his power to prevent government oil companies from increasing prices: for a year before the 2004 general elections, the National Democratic Alliance government sat tight on petroleum product

prices. The UPA government has been no less hypocritical.

That India cannot be entirely insulated from global oil volatility is hardly debatable. The country imports close to 80 percent of its crude requirements, even though it has enough surplus capacity to export refined petroleum products (by Reliance Industries). Domestic prices of petrol, diesel and other products were relatively stable between mid-2008 and mid-2009, even as world crude prices careened from less than 25 dollars a barrel in March 2003 to a record high of 147 dollars a barrel in July 2008 before crashing to a low of less than 40 dollars a barrel in January 2009. The reason for the paradoxical stability in India: the general elections that took place in April-May 2009, and which returned the UPA to power.

As for the recent hike, the government knew, surely, that it would unite the fractured political opposition on both the Right and the Left, and that strikes would disrupt normal life. It was not surprising that protests spilled onto the streets, proceedings in Parliament were disrupted, and serious offence was given to sections within the ruling coalition and the Congress party. Backgrounding this disquiet is that the government had anticipated the hike to, literally, add fuel to already-raging inflationary fire, shrinking the real incomes of the poor.

Why, then, were the prices hiked when international crude oil prices are relatively stable, having varied between 70-80 dollars a barrel between mid-2009 and July 2010? The cynical answer runs like this: the opposition to the government is disunited; the Bharatiya Janata Party is in disarray; 2011 will see the Communists become weaker than they already are; the next general elections are four years away; and, finally, India’s elite just doesn’t care about how inflation injures the vast majority.