Economic Highlights

New Delhi, 25 May 2012

US Cuts Petrol Price

INDIA HIKES ON PHONY GROUND

By Shivaji Sarkar

As international crude price falls and the US reduces domestic petrol price, India resorts to a sharp increase in rates. Indeed, petrol price has almost doubled since 2009 and this week’s sharpest increase of Rs 7.54 a litre totals a shocking 25 per cent hike in a year.

Undeniably, this is a severe blow to an economy reeling under severe inflation. The plea of oil companies that they are losing Rs 8 per litre is suspect. International crude prices have come down and are hovering around $90 a barrel. The US has cut domestic prices to a record low of $3.36 a gallon. It is a surprise that Indian consumers are burdened so heavily.

The plea of under recoveries by companies is euphemistic. Decade after decade it has been observed that with each increase in petroleum prices, profits of companies soar. The alibi of under recovery has become too hackneyed. The corporations increase prices and give largesse to their directors and employees.

This time they argued that as the rupee was losing value against the dollar, the companies were incurring losses. Remember, the rupee was hovering around Rs 49 for a long time. The rupee’s volatility during the last one month is no reason for incurring losses. International purchases are made at least six months in advance. Thus, the arguments of the companies are too phony.

Pertinently, eight petroleum companies have earned higher profits, Rs 32890 crore in 2009-10 against Rs 27189 crore in 2008-09 despite a rise in international prices and higher contribution to the Centre and State Government exchequers. The profit in 2010-11 is estimated at Rs 24000 crore. In the past too, the oil corporations earned much more than their projected profits.

Yet bureaucrats present oil figures in a convoluted manner to the Minister, who is taken for a ride. But complex logic suits the Government very well as each increase in oil price helps it fund its budgetary deficit.  As the Government has incremental growth in taxes with every increase in prices of petroleum products. As inflation adds to the Finance Ministry’s kitty. Never Mind the common man’s woes.

In fact, the petrol price hike needs to be seen in the light of the total economy. The US has found the higher its fuel bill, the lower are its developmental and growth parameters. Thus, it is Washington’s policy to keep the fuel bill low to facilitate its economy on an easy growth path and accelerate the growth process.

Also, a lower fuel bill helps its citizens and transport movement.

Interestingly, the US does not see fuel price as a mechanism to raise revenue. In spite, of its Administration being under the worst pressures during the last three years. However, its Federal Reserve Chief Bernanke impressed upon the Administration to keep the fuel bill low along-with interest rates till 2014. The reason: Facilitating economic development.

Significantly, in April petrol prices in the US fell 2.6 per cent, the biggest decline in six months. While food prices and housing costs both edged up 0.2 per cent as low fuel rates provided a large cushion.

Sadly, India does the contrary. Petrol still does not cost more than Rs 44.72 in Delhi. But it has a Central and State tax component of Rs 65.64 raising the actual price to Rs 73.18. Recall, this convoluted tax system began in the 1970s, when some bureaucrat suggested that heavy taxes on petrol would “reduce consumption and the consequent import bill”.

But the contrary happened as consumption increased. Till 15 years back the country used to import around 67 per cent of its needs, today it imports over 80 per cent as domestic production is able to meet only around 20 per cent of the nation’s requirement. Therefore, the argument of high taxes to contain imports has failed but the greed of the Government has increased.

Undoubtedly, this is where the economic mess begins. Whereby, it hurts not only the domestic economy but even India’s diplomacy as seen in Norway and Saudi Arabia’s reactions for the losses their telecom companies suffered in the 2G spectrum scam.  More so, as Saudi Arabia remains the largest oil producer in the world.  Needless to say, souring of ties can lead to a crisis for India.

Specially, as India is trying to create the largest refining capacity. As of June 2011 the country has a total of 21 refineries of which 17 are in the public sector, three private and one as a joint venture between BPCL & Oman Oil Company. Totalling, a refining capacity of 193.386 million metric ton per annum. Making the country not only self sufficient in refining capacity for its domestic consumption but also enables it to exports petroleum products substantially.

Moreover, as refining is considered as ecologically hazard industry with both Europe and the US not adding to their capacity, India is trying to take advantage. Wherein, it exports refined products to many Asian, European and African countries. This ensures higher foreign exchange earnings and adds to the kitty of petroleum companies. But again, this benefit is denied to domestic consumers, who by paying higher petrol prices fund these activities.

But there is a flip side too. As Europe and US gradually find dwindling crude deposits, both are also slashing investments in refineries and are instead, investing heavily in alternative energy sources to create an economy of scale in those areas --- be it fuel cell, hydrogen, wind, solar or bio-mass.

Further, Europe views Indian investment in refineries as its own gain wherein it provides machineries and expertise. As this reduces their investment in what might become an obsolete industry in the coming decades.

In sum one needs to see whether India’s decision to hike petrol prices is a classic case of penny wise pound foolish.  Given that the country does not have enormous petroleum reserves but is one of the highest in consumption. The reason is simple. Its alternative energy programme is merely cosmetic and it is dependent on Western companies and their imported technology.

Consequently, if the country wants freedom from high fuel prices, it has to change its policy. It needs to consider fuel prices as the bedrock of its economy which needs to be kept low. Simultaneously, non-petroleum vehicles use should be promoted to cut dependency on fuel imports. India also must invest heavily in alternative energy research to create an effective alternative non-grid linked source. ---- INFA

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