Economic Highlights

New Delhi, 19 January 2013

Diesel Price Hike

AIDING BIG PVT PLAYERS?

By Shivaji Sarkar

The saying that there’s more to it than meets the eye can aptly apply to the recent decision of the Government to raise diesel prices. In fact, one could almost accuse it of a “hidden agenda” For it has not merely hiked the price but has deregulated the oil sector, with an eye to appease private sector oil companies.

In addition, the Government has raised the cost of kerosene by Rs 2 and of “non-subsidised LPG” by Rs 46 more, much to the chagrin of the common man. However, it seeks to lessen the blow by saying that it is increasing the number of subsidised cylinders from six to nine. But is it any helpful, given the fact that an average family requires 13 to 15 cylinders a year. At the end the public continues to be short-changed.

But it seems to be of little concern. For as of now, its decision has opened an avenue for it to raise Rs 25,000 crore from divestment in oil companies, pave way for the private sector oil companies to enter the domestic retail and bulk oil trade. In fact, in the long run it may possibly set the exit route for public sector companies from oil trading. They might repeat the fate of Air India, which suffered heavy losses as many profit-making routes were not only closed but were opened to its competitors.

The bonanza for the private sector is indeed a political decision in a critical election year that is to see nine State elections, followed soon by the Lok Sabha polls. However, the aam admi has the misfortune of suffering a severe inflationary situation. Goods and food stuff would become too dear to afford.

As of now, companies would rake in huge profits. Notably, they had raised the bogey of under recoveries to the extent of Rs 78,000 crore, which has been questioned by everyone including the Finance Ministry. The figure for diesel is Rs 15,000 crore a year.

On its part, the Government has been justifying its decision by stating that its “subsidy” bill had been rising. On an average, the Government claims it pays approximately anything between Rs 30,000-40,000 crore a year as subsidy. Though it is allocated in the Budget it is rarely actually transferred to the oil marketing companies.

That subsidy figures and under recoveries are far from reality is also evidenced by the reduction in petrol price by 25 paise. In effect, the difference in price between petrol and diesel will steadily narrow down. Additionally, deregulation of diesel prices may soon open up the retail petroleum trade to private operators. For starters, Essar Oil has already welcomed the move and suggested that it may even consider entering the domestic market in a big way.

Furthermore, the Government’s decision to increase the charges for bulk purchase by Rs 11 a litre i.e. to Rs 58 (Retail diesel price is Rs 47.65 a litre), is too a deliberate move to help the private players. Public sector companies have not been given any leeway to sell diesel at a lower price to bulk consumers such as transporters, power companies, railways and defence and even housing societies would need to shell out the higher bulk price to operate their Gensets.

Interestingly, bulk consumption accounts for 18 per cent of total diesel sales. In all certainty, this would create an unhealthy competition and undercut the market for public sector oil companies. Private oil marketers are likely to come with sops, which would again affect the profitability of pubic players.

Undeniably, the debate that is veering around a burden on the common man is peripheral. It is much more as it would definitely increase cost of every service. Let us be prepared that the burden is going to be manifold. Commutation expenses are to increase. But this would be at a lower level for the next few months as retail prices would rise gradually.

However, bulk transporters would be hit the worst making all other transportation expensive. It would increase price of every product. Even food grains and other farm goods input cost would increase as diesel remains the staple fuel for most farm equipment including tractors, pump sets, threshers. They would have no choice but to pay the bulk rates. Thus, food inflation that continues at over 10 per cent for the past many years may see a further hike.

But those are considered “populist” discussions. The immediate fall out was seen in the Mumbai Stock Exchange. Shares in Oil India rose as much as 20 per cent on Friday, adding $1.1 billion to its market value. This is in sharp contrast to the failure of ONGC divestment in March 2012. Most foreign buyers stayed away from $2.6 billion stake sell.

Now the Government is hopeful that soon it would be able to raise Rs 25,000 crore from oil PSU disinvestment and be able to contain the budget deficit. It is a different story that it also increases outgo of dividend to private stake-holders. So far divestments have raised a modest Rs 5,000 crore against a target of Rs 40,000 crore.

However, Indian stocks, bonds and the rupee all rallied on the Government's decision with the rupee at its highest level in recent times at Rs 53. Earlier it was Rs 55 and beyond. The trend also suggests that the claim of the Government and oil companies that they are losing because of the rupee is not correct. Overall the very rationale of increasing the prices is suspect. It also means, even if the claims of the companies are accepted, the under recoveries, if at all, are at a far lower level. Obviously, the raising of price of petroleum products is not based on any firm principles.

While the Government may want to quote the International Monetary Fund (IMF) has been advocating higher energy prices, it has been observed worldwide that it has given a boost to profits of only the major oil producers. Both Europe and the US are suffering heavily because of the monopoly of their MNCs. While voices are being raised against high energy prices in those countries as well these unfortunately get submerged by strong lobbying of powerful oil giants. Sadly, India has not learnt from the West’s miseries and it is following the same path.

Making petroleum products dearer is resulting in the overall slowdown of the economy. Many industries such as steel-rolling, arc furnaces are finding such high prices unaffordable and have closed shops in many northern States including Uttar Pradesh, Punjab and Orissa.

To top it all, Opposition parties though oppose for the sake of opposition have unfortunately not come out with a new policy statement to counter the Government’s and companies arguments. The reality is that low energy prices are a necessity to contain inflation. This is not happening. The people will continue to lose more rather than gain from the latest move. But does the Government care? ---INFA

(Copyright, India News and Feature Alliance)