Petro-nomics

Why did the government choose to hike the prices of all petroleum products — including the most politically-sensitive and highly-subsidised kerosene and cooking gas — at this juncture? It must have anticipated that this decision would unite the Right and the Left, that its opponents would disrupt normal life and that sections within the ruling coalition would be unhappy. Further, the powers-that-be surely knew that the hike in petro-product prices would literally add fuel to inflationary fires that are raging, shrinking the real incomes of the poor.
So why did the government decide on such an unpopular step even as the Prime Minister flew to Toronto to attend the G-20 meeting on how to improve the “fragile” state of the planet’s economy? When Dr Manmohan Singh returned home, he said that after petrol, diesel prices would soon be freed from administrative control.
Here’s what the Prime Minister said: “People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making… The subsidies on petroleum have reached a level which is not connected to sound financial management of our economy. So, this decision has been taken to put some burden on the common people, but it is manageable”.
Petroleum minister Murli Deora has calculated that for an average consumer the burden would be less than Re 1 a day for using cooking gas while kerosene users would shell out 26-27 paise extra each day, that is, assuming they get kerosene at the proper price — which is now around Rs 12.50 a litre, still Rs 15 a litre lower than what the price would have been had it been “market determined”. The price of kerosene was last hiked in March 2002 to around Rs 9.30 a litre from Rs 2.50 a litre fixed in January 1998. Without any subsidy, each cylinder of cooking gas would cost Rs 225 more than what it is at present (after the price hike).
Mr Deora has acknowledged that roughly 40 per cent of the kerosene that is distributed in the country goes for adulterating petrol and diesel and is also smuggled out to neighbouring countries. For decades, kerosene distributed by state governments has not reached the needy, nor has the fuel been used for cooking and lighting. Even after the latest price hike, the gap between kerosene and petrol/diesel prices is wide enough to ensure rampant adulteration.
The government has tried colouring kerosene blue and putting chemical markers in the liquid, but these have not been effective in curbing misuse. Remember Shanmughan Manjunath, the IIM Lucknow graduate who worked with the Indian Oil Corporation? He had ordered that two petrol pumps at Lakhimpur Kheri in Uttar Pradesh be sealed for three months for selling adulterated fuel. On November 22, 2005, three days after he conducted a surprise raid on the pumps, his bullet-ridden body was found. The owner of the two petrol pumps and his employees and accomplices were later arrested.
Targeting subsidies is easier said than done. Oil companies have tried to ensure that commercial users of liquefied petroleum gas (LPG) use cylinders that are not red in colour — with some success. The 14 million petrol-consuming passenger cars in the country may be mostly used by the well-off, but not the 80 million two-wheelers that also run on petrol. An estimated four million trucks and buses and the Indian Railways together use up nearly two-thirds of the total diesel consumed. Close to a fifth is used in agricultural pump sets and tractors. But the remaining 15-20 per cent of the total diesel consumed in the country is by owners of fancy passenger cars and for generating electricity — for instance, to run air conditioners in fancy shopping malls.
Few believe the government when it says the increase in petroleum product prices will increase inflation by less than one per cent. Yes, transport accounts for around five per cent of the total cost of most products and the cost of diesel is one-third of the total transportation costs. The fact is that a higher diesel price has a cascading impact on the prices of a wide range of products, particularly food items, since retailers tend to disproportionately increase the prices of goods transported. Simply put, if transport expenses go up by, say, five per cent, the price of tomatoes that are transported to shops by truck could go up by seven-eight per cent.
What the government does not publicise is that total taxes on petrol are more than half its selling price and around 30 per cent of the price paid by a consumer of diesel is in the form of taxes. Roughly 37 per cent of the selling price of petrol comprises excise and customs duties, which accrue to the Union government. By way of contrast, total taxes on petrol are 37 per cent in Sri Lanka , 30 per cent in Pakistan and 24 per cent in Thailand, while taxes on diesel are less than 20 per cent. Excise duties from petroleum products contribute 45 per cent of the Indian government’s total excise collections. Are you then surprised that the country’s rulers are keen on protecting the health of the fisc, not the health of the aam aadmi?
Another point inadequately publicised is that the recent price hike will enable private retailers like Reliance to reopen franchised petrol pumps, which had been lying closed since 2008.
In April 2002, the Atal Behari Vajpayee government had decided to dismantle the administered pricing mechanism for petroleum products to let oil companies decide what prices to charge consumers. The then petroleum minister Ram Naik did not wish to give up his power to disallow oil companies from increasing prices. He had his way and the National Democratic Alliance government did not hike petroleum product prices for a year before the 2004 elections.
That India cannot be completely insulated from volatility in world oil markets is a no-brainer since the country will be importing close to 80 per cent of its total requirement of crude oil this year — even as Reliance merrily exports refined petroleum products. The point is that international crude prices have fluctuated between $70 and $80 a barrel for the better part of the last 12 months. So what was the urgency to hike petroleum product prices and free petrol prices from administrative control?
Answer: The political opposition to the ruling Congress party is in disarray, the next general elections are four years away and sections of India’s upper middle classes just don’t care about inflation hurting the underprivileged.

Paranjoy Guha Thakurta is an educator and commentator