Economic Highlights

New Delhi 17 June 2008

Petroleum Prices

NO MORE ELECTORAL POLITICS 

By Dr Vinod Mehta

(Former Director, Research, ICSSR)

The hike in the prices of crude is hurting almost all economies of the world, which are heavily dependent on the import of oil and India is one of them. It imports 70 per cent of its requirements. But the domestic selling price of petroleum products has never become a political issue in countries other than in India and a few others. The reason being that we have created such an irrational and complicated structure of prices of petroleum products that even god would not understand.

Most countries that are heavily dependent on oil import are known to raise the prices of petroleum products without any fuss as soon as the prices of crude go up in the international market. Consumers may not like it but they too realize that there is no way out other than increasing the domestic selling price.  Therefore, they either take it in their stride or respond by switching over to smaller cars or use public transport.

There is no economic sense to either produce or procure a product, say, for Rs 100 and sell it for Rs 80.  Someone has to account for the loss of Rs 20. This kind of policy was one of the many reasons, which undid socialism.  The erstwhile socialist countries took pride in holding the price line for decades but never explained how they were able to do it when the production costs had gone up.  It boiled down to subsidies and deficit financing, but in the end their national finances went haywire leading to the demise of socialism.

The Chinese Communist Party saw this folly a long time ago and is seen rapidly building up a market-based economy.  After Deng Zhao Ping went further with  economic reforms, a telling comment came from a Shanghai-based small trader-- that he would like to join the Party after he had earned enough profits from his business and eventually became a capitalist!  Cuba after Castro is too slowly giving up such policies.  The only country left in the world to follow the pricing policies of erstwhile socialist era is North Korea.

India has also been following the “socialist” pricing policy in respect of at least two commodities, namely petroleum products and fertilizers for the past many years.  In the case of petroleum products it is cross subsidy--levy higher taxes on petrol in order to keep the prices of kerosene, cooking gas and diesel low.  As a result the domestic price of petrol is unrealistically high and that of other petroleum products unrealistically low. Since the prices are fixed by the Government in a market economy like India, the oil companies suffer.  In the case of fertilizers the domestic selling price for various kinds of fertilizers is between 30 and 50 per cent of the production cost/import cost, with the government having to take on the burden.

All political parties have accepted this kind of pricing policy for petroleum products and fertilizers only to the extent that they would simply oppose any realistic hike on the grounds that it will hurt the common man, when in opposition, knowing fully well that it could jeopardize the nation’s finances.  If the common man can absorb the hike in the price of milk and vegetables, when he can buy designer wear or visit swanky coffee shops and buy a cup of coffee for Rs 60, why can’t he absorb the hike in the price of petrol if the international price of petrol goes up? Similarly, why can’t the families afford to pay the realistic price of cooking gas?  Any increase in the price of cooking gas finds the media rushing to interview some middle class ladies on the affect on their family budgets. Invariably each one of them is smiling and condemning the price hike.  This scenario has become a stale ritual.  Media never asks these ladies, why they are peeved at the hike in price of cooking gas when they don’t think twice of buying an expensive dress from a boutique or when they go shopping for branded shirts and trousers for their husbands or branded shoes for their?  If all such kind of expenditures does not upset their family budgets, why would some hike in the price of cooking gas or say petrol hurt this budgets?

The pricing of petroleum products regrettably has gone out of the realm of economic logic or common sense in our electoral politics.  It has become a mighty stick to beat the Government in power with.  Thus, when electoral politics and not the market decides the pricing of certain commercial products, it is a sure recipe, for disaster of national finances.  No political party or a coalition will ever gain an upper hand in this kind of pricing policy, only the economy will suffer and so will be the common man, who will be asked to pay more taxes.

It is high time that we get out of this highly convoluted pricing policy of petroleum products once for all.  Take it out from the realm of electoral politics and back in to the realm of economics so that people know what exactly they have to pay for petroleum products as they pay for a number of other products in a market economy.

By holding on to this kind of convoluted pricing policy we are sending wrong signals to consumers, who can afford to use and perhaps waste these precious resources as the Government is willing to share half or the costs with them.  But the consumers should know that the Government will take back its share by either imposing more taxes, or adding service tax or some other commodity tax.

We are also sending wrong signals to the oil cartel that they can raise the price of crude to any extent as the Indian Government will always be willing to absorb the price hike by subsidizing it to its consumer. 

No modern government can escape providing subsidy to its people depending upon the particular needs of its people.  City public transport system in most of the developed countries runs on subsidy.  While any country which is rich can pay subsidy on any number of products, India cannot afford to do so and therefore, it has to be choosy. Our education system, health care services and drinking water needs require more subsidies than perhaps anything else; commercial products certainly not.

Petroleum products are certainly commercial products and should be charged commercial rates.  Let prices rise if the international prices go up and let prices go down if the global prices go down.  It’s time the Government grows out of its role of fixing prices of petroleum products and assume the role of a watchdog so that oil companies do not take the consumer for a ride. –INFA

(Copyright, India News and Feature Alliance)