Unjustified High Oil Prices - Achhe Din Nahin? Bure Din Aya! Are high oil rates in India justified today what with international oil prices around US $82/- per barrel, that is, Rs.4,500/- for around 150 liters? As per experts, the falling prices are due to the growth in supply and the decline in demand. Energy production in North America has increased quite significantly and OPEC countries remain hesitant or unable to cut production significantly. And, there is global economic slowdown including China and EU. Since mid-June, the price of Brent crude oil has fallen by nearly 25 percent -- going from a high of $115 to about $82 a barrel. They predict that oil prices will remain near current levels through at least the end of 2015. These factors could make it harder for global oil prices to rebound to their previous levels. Today, the international production cost is just around Rs.25/- per liter. And, the retail price of petrol in USA is generally around US. $2.98 (Rs.180/-) per gallon (3.8 liters). It implies final retail cost of around Rs.47/- per liter. It is inclusive of taxes, transportation costs and dealers commission. If so, are the current retail rates in various outlets in India justified? It is almost more than than twice of production cost. For example, the current retail rate of petrol at Delhi is Rs.64.25 per liter; diesel is Rs.53.35/- per liter. In Hyderabad, the retail rate of petrol is Rs.70.19; diesel is Rs.58.11 per liter. Why impose the burden on the consumer? In no way, one can justify well above doubling of the retail cost and imposing the burden on the Aam Admi. After all, the additional cost of transportation and refining amounts barely to Rs.2 to 3 per liter. As on date, dealers commission is also insignificant lower than Rs.2/- per liter. The rest of the burden imposed is on account of Central and state government taxes. And, the reason for such high variation in Hyderabad is due to high State government taxes. What does the above data indicate? It is simple. The high rates of petroleum products are largely due to high taxation levels. When international oil prices increase, hike in domestic oil prices is automatic. There is least concern about its cascading effect on inflation due to higher energy costs in all sectors. In contrast, when there is deep decline in international oil prices, there is no automatic reduction in domestic oil prices. Political leadership shed ‘crocodile tears’ on account of international hike in petroleum products, which largely governs the cost of living. After all, airlines, railways, road transport corporations, private transport agencies, all types of freight services, autos, taxis, tractors, bore well operators and so on automatically increase prices of their products based on prices of petroleum products at international levels. Ironic, but true, when prices of various petroleum products go skyrocketing, all dependent agencies automatically hike their rates, particularly petrol and diesel after deregulation. The above agencies do not automatically carry out downward revision of prices in tandem with the downward trend of international oil prices. Why? Let me briefly present the realities of oil price hikes since 2000. In early 2000, petrol prices were around Rs.26/- per liter and diesel prices were at Rs.14/- per liter. Thereafter, there were marginal increases until with petrol at Rs.34/- and diesel at Rs.22/- in 2003. Followed the steep hike by 2005 with petrol at Rs. 44/- and diesel at Rs.31/-. In 2008, when crude price was at an all time high of US $148 per barrel, the price of POL products were as low for petrol as Rs.45/- and diesel as Rs.33/- per liter at Delhi. Finally, petrol prices reached an all time high when they crossed the Rs. 70/- per liter in 2013. So also, there was increase in the diesel prices. The figures speak for themselves. The ‘common justification’ given includes: ‘Oil Companies’ are running at a loss due to under recoveries; “Weak Rupee”; domestic prices move in tandem with international oil prices; heavy burden of subsidies which is unsustainable for the exchequer; and so on. In reality, successive ruling regimes have been bluffing and fooling the people not only justifying hike of various products of oil prices but also justifying hike in rates of all public utilities particularly passenger and freight services and its fallout – inflation. The economic logic justifying the fraud on the people of India is bizarre. The factual position exposes the fraud of successive regimes on the gullible people of India. De facto, high tax recoveries are the root cause of high prices of petroleum products despite deregulation of petrol and now diesel. Taxes in India are significantly higher than the taxes in other countries. A large portion of the retail prices that the consumers end up paying consists of taxes levied by both the central and state governments. Next, the governments claimed in the past that diesel, LPG and kerosene are heavily subsidized. Thus, there was tremendous pressure on the Indian exchequer. As per the annual report 2009-10 of the ministry of petroleum and natural gas, the prices of all the products, except kerosene, are significantly higher than their respective prices in the international market. A significant thing to note is that this was true for even the subsidized diesel and LPG. Yet another significant issue is whether the government is actually running a deficit vis-a-vis the petroleum sector. A macroeconomic view of the petroleum sector gives us an exactly opposite picture. Surya P. Sethi, former energy adviser to the Planning Commission, estimated the contribution of this sector through taxes to the central as well as the state governments and contrasted it with the total subsidies provided by the government. Comprehensive studies carried out by experts highlight that the tax contribution of the petroleum sector is higher than the subsidies provided by the government, inclusive of the so-called under-recoveries. During the year 2010-2011 (data taken from Editorial, Peoples Democracy, July 03, 2011), the contribution to the central government exchequer from the petroleum sector is reportedly Rs 1,36,000 crore and to the state governments about Rs 80,000 crore. The subsidy provided by the government including the oil bonds issued on the public sector oil marketing companies during the same period is Rs 40,000 crore, i.e., 20 per cent of petroleum sector’s contribution in taxes and duties. Next, it is often quoted that the oil companies are incurring losses due to the governmental regulation due to under-recoveries. Under recoveries is also a controversial issue. The difference between the cost price and the realized price represents the under-recoveries of the oil marketing companies (OMCs). The realized price is the post-tax price. As per experts, there are two problems with this dubious concept. First, if the pre-tax prices are higher than the cost price, there can never be any loss to the exchequer on the whole. Since it is the public sector companies which primarily fund the under-recoveries, this amounts to saying that the government is taking more from the left hand (taxes from these oil companies) and paying less to the right hand (under-recoveries) and yet claiming that it is running huge deficits. Nothing can be more deceitful than this concept of under-recoveries. In accounting terms, these under-recoveries would disappear as soon as the taxes are lowered significantly to an extent that the post-tax prices are higher than the cost price. Second, these companies, despite under-recoveries, are making enormous profits. The reason for the difference between under-recoveries and profit statement of the OMCs is that the latter takes into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies. So, quite apart from the first reason, the concept of under-recoveries does not hold much ground especially since they are otherwise making profits. The current international rate of less than US $82/- per barrel enables the government and the oil companies to keep the retail petrol rate around Rs.50/- per liter and diesel around Rs.40/- per liter. Given the above realities, Modi’s BJP government may like to further lower the retail rate of petroleum products by reducing taxes at the central government level. Similarly, State governments too should reduce the burden of taxes on the consumer. In fact, it is high time that there should be uniform prices for all petroleum products throughout India. Such a step would certainly earn the ruling regimes tremendous amount of goodwill.
Posted on: Sun, 09 Nov 2014 07:52:08 +0000
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