India's Most Influential Business and Economy Magazine - A Planman Media Initiative 
 Search  
  Other Sections
  
  • Home
  
  •  Cover Story
  •  B&E This Fortnight
  •  B&E Indicators
  • BE Corporation
  • Exclusive Column
  • Finance
  • Governance
  • International Column
  • Overseas Talk
  • Policy
  • Scrutiny
  • Sector
  • Snapshot
  • Stratagem
  • Testimonial
 


Share |
Governance
 
OMC: FUEL PRICE HIKE
Rubbing Salt in The Wounds
Post The Steepest-Ever hike in Petrol Prices since December 2008, The Government is all set to Increase The Prices of Diesel, Kerosene and LPG. There is no Respite to The Common man’s agony.
Issue Date - 09/06/2011
 
While Buddhadev Bhattacharjee, former Chief Minister of West Bengal, failed to read the pulse of the electorate and thereby played his own crucial role leading to the historic fall of the red bastion in West Bengal; but his biting observation during the electoral campaigns that a hike in oil prices would be the Centre’s gift to the electorate soon after the elections apparently seems to have come true. Soon, after the election results of the four states and a union territory were declared, the oil marketing companies (OMC’s) guided by informal advice from the Ministry of Petroleum (to be read as the central government) called for a steep hike of Rs.5 a litre in petrol prices. While, the opposition parties, for their own hidden political motives, lambasted the government for the decision, the aam admi (common man) has been left unto himself to bear the brunt of the whammy. An approximately 56% increase in the retail price of fuel over a period of two years (the retail price of a litre of petrol in New Delhi on 15 May 2009 was Rs. 40.62, which post nine successive hikes and the Rs.5 per litre hike on 15 May 2011 is pegged at Rs.63.41) is certainly too harsh for the mass. But interestingly, the government considers that the price rise in petrol will have “marginal impact” on consumer sentiment. And laughably OMC’s argue that the increase has been “moderate”. But then, certainly it’s moderate. At least when one considers the fact that the empowered group of ministers is likely to take decision on increasing the prices of diesel, kerosene and LPG very soon. The real tough time will start only after their announcement.

While the timing of the OMC’s decision was undoubtedly a political one, the economic aspect of the decision, given the crude oil prices in the international market (hovering over $110 a barrel), can not be totally criticised. The recent hike in retail prices will help the OMC’s, in particular, to reduce their under recoveries (analysts at Bank of America Merrill Lynch estimate that despite the price hike, the absolute figure of under recoveries would still be more than Rs.1 trillion). On the economic front, while the likes of Kaushik Basu, Chief Economic Advisor in the finance ministry, and Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, argue that the increase in administered retail price of petroleum products would have a relatively less harmful effect on inflation compared to a slippage in the fiscal deficit, the opposition claim that the hike will have an adverse effect. In fact, they (Left in particular) argue that if a rationalisation of the tax structure on import of crude can be done, wherein the cess revenue earned by the government due to increase in international crude oil prices is returned to the OMC’s, then there would be no need to hike the prices and unnecessarily burden the common man. Truly so, a back of the book calculation makes it amply clear that various taxes shave off around 40% of the price of petrol. At this juncture it needs to be remembered that the taxes are levied as a percentage of the basic price of the fuel and aren’t fixed per litre. However, the government on its part is unlikely to tinker with the prevailing taxes as any reduction in taxes would definitely upset its finances and blunt its effort to keep the fiscal deficit within the set target of 4.6% of GDP.

 
It is but evident that the government is more interested in seeing to it that it does not miss its set statistical target and that the OMC’s do not continue to bleed while the common consumers who are already bearing the brunt of inflationary pressure are left to find a solution for themselves. At the same time, the government is wary of the cascading effect that a hike in the prices of petroleum products have and hence is expected to stay away from the decision of deregulating diesel prices on the lines of petrol prices (the petrol prices were deregulated in June 2010 on the recommendations of the Kirit Praekh led committee report) any time soon. As per estimates of the petroleum ministry, oil firms lose Rs.4.8 billion every day on the sale of diesel, kerosene for public distribution system and cooking gas cylinders. One may argue as to why not target diesel prices then. The government think tank believes that diesel prices have a higher impact on inflation as most goods are transported by trucks. As a matter of fact, the weightage of diesel in the inflation basket is 4.67% as compared to 1.09% assigned to petrol. Thus a Rs.3 per litre increase in price of diesel would result in inflation surging by 25-30 basis points (the direct impact on inflation of the current hike in petrol price is 8 basis points). And this is precisely the reason as to why the government has for now withheld the decision of deregulating diesel prices.

Deregulation or no deregulation, the fact of the matter is that post the EGoM (empowered group of ministers) meeting headed by the finance minister Pranab Mukherjee, the common man should be well prepared to absorb the shock resulting from the estimated Rs.3-5 /litre increase in price of diesel, Rs.2-3 /litre increase in the price of kerosene and a hike of Rs.25-50 / LPG cylinder (pessimistic estimates). Nevertheless, while the common man may cry foul, keeping in mind the fact that with the next set of state elections due nearly a year later, the government will toe the hard line for sure. But then, what is more shocking is the attitude of the political parties who earlier (January 2011 when the prices were increased by Rs.2.50) cried foul at not being consulted, have chosen to remain quiet over the entire episode this time.

Amidst all the talks of common man and his plight, what perhaps makes the OMC’s to keep on hiking the petrol prices is the double digit growth in the consumption of petrol. But then, aren’t the OMC’s incurring losses because of diesel and LPG? Perhaps not for the government, despite the fact that 60% of their (OMC’s) products comprise of diesel, kerosene and LPG.

Oil certainly plays a vital role in shaping up the country’s economy. More so for the fact that India is a huge importer of the same. But then this critical situation calls for a better governance on part of the government to ensure a future for the country, rather than playing politics in the name of sound economics.

Gyanendra Kumar Kashyap           

Share |
 
 


      
Comments   
   
      
Leave your first comment

   


     Leave Comments to this story    
     
Name:  
Comments:  
Email id:  
City:  
 
 
Busines & Economy is also associated with :
©Copyright 2008, Planman Media Pvt. Ltd. An Arindam Chaudhuri Initiative. With Intellectual Support from IIPM & Malay Chaudhuri.