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Business
Complex petroleum product pricing financial scene
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The decision to go back on the planned decontrol of the oil sector is a monumental error of judgment
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— PHOTO: S. S. KUMAR
OIL CONUNDRUM: Vehicles jostle at a gas station in Chennai prior to the announcement of fuel price hike last week.
Last week’s hike in the prices of petrol, diesel and cooking gas was not unexpected although its quantum, particularly in the case of petrol, was considered harsh in some quarters. The Government’s decision came after considerable dithering. The delay, attributed to endless consultations, left everyone guessing and did not help the Government’s case either in a political sense or even commercially.
Weeks before the price hike, practically everyone knew that the existing retail price structure was unsustainable and that in the face of the relentless rise in crude oil prices, there was no option but to revise them upwards. The question essentially was not whether but when and by how much.
The delay in arriving at a decision heightened the anxiety of the common man. It probably led some retail stockists to hold back stocks hoping to profit from the imminent price rise. The deteriorating finances of oil marketing companies came into full view. Topics such as “under recoveries” (by oil companies) have come to be discussed freely as if they are something people have lived with for a long time.
Most taxed sector
The petroleum sector is the most heavily taxed, both by the Centre and the States. This fact, though well known, came into sharp focus. One view was that before any price rise, the possibility of lowering taxes should have been considered. A more extreme view was that the Centre should absorb all the oil companies’ losses by foregoing taxes and if necessary taking over the balance losses even if this increased its fiscal deficit.
Such a view had gained currency at a time the Government hoped to increase spending on a number of populist measures, including the Rs. 71,000-crore bank loan waiver. The Finance Minister had claimed earlier that he had enough head room to even meet some non-budgeted expenditures such as the implementation of the Pay Commission report. Taking into account the impressive GDP growth and tax buoyancy, the picture of government finances was projected to be brighter than what it was. Any extra burden on account of larger subsidies to the oil sector could be countenanced and provided for without any major hiccups or so, the argument went.
Difficult exercise
An unimaginative government communications strategy has made the difficult exercise of petroleum pricing even more difficult. What could have been done better?
First, it is necessary to debunk certain well entrenched myths. The petroleum sector might yield the largest tax revenues, but obviously these are finite. Again, there are many competing claims for the large tax collections. Schemes such as the loan waiver or extension of the NREG (National Rural Employment Guarantee) scheme probably figure higher in a list of politically sensitive schemes. Other countries tax their petroleum products even higher.
The objective, often, is to rein in consumption as much as boosting government revenues. This time the tax concessions amount to Rs. 22,660 crore. These represent income foregone by the Centre.
The States will have to do their bit by reducing sales taxes and other local levies. Three States, including Tamil Nadu, have announced reductions.
Second, the burden of high oil prices is essentially on the consumer. This is largely true but the consumer alone does not bear the entire impact. Because of the complex method of fixing retail prices of petrol and diesel as well as LPG and kerosene, the impact of oil prices on other "stake-holders" is generally not so apparent.
This time the oil marketing companies’ predicament in the face of government inaction was in the news. That they would lose nearly Rs. 245,000 crore this year, if there was no price revision, was the reason given to revise the retail prices.
Unequal burden
There are, in fact, four parties including the consumer who share the burden of high oil prices. A price revision therefore affects all of them. The governments at the Centre and in the States which collect taxes, the upstream oil companies ONGC, OIL and GAIL (which subsidise the marketing companies), and the oil marketing companies themselves are the other parties to the great petroleum pricing debate.
The pricing formula is all about allocating the burden among different parties as equitably as possible. It is a different matter though that exigencies rather than sound economic principles dictate government action. This time the losses of oil marketing companies are to be met by duty cuts (8.57 per cent), subsidy from ONGC and other upstream companies. The price rise will account for 8.62 per cent of under recoveries. There will still be a large portion left uncovered. The Government will have to issue oil bonds for an estimated Rs. 93,000 crore still. The complex methodology unwittingly pits one stakeholder against the other.
The Government is seen antagonistic to the consumer by refusing to cut taxes significantly. Public sector upstream companies have to subsidise the oil marketing companies. The refining companies in the private sector need not. Irrespective of whether global oil moves further up or not, the complex price determination process will lead to further confusion and increase tensions among all stakeholders.
In retrospect, the decision to go back on the planned decontrol of the petroleum sector was a monumental error of judgment. Up to September 2003 there was parity between international and domestic prices with a decent refiner’s margin. Since then it has been a one way upward movement for global oil prices.
C. R. L. NARASIMHAN
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