What
on earth are they thinking? In the midst of an almost
unprecedented and continuous increase in the price of
necessities, which is increasingly translating into
generalised inflation, the UPA government has chosen
to ''free'' the price of petroleum products, to bring
them in line with international prices. What this translates
into is a significant and immediate increase in oil
prices. And since oil is a universal intermediate (which
enters directly or indirectly into all other prices),
this necessarily means a further rise in inflation.
This is a move that is inexplicable from the point of
view of general economic policy. Inflation has emerged
as a major problem for the government especially in
the past few months, first with food price inflation
and now with more general price increases, such that
in the year up to May 2010 the Wholesale Price Index
increased by 10.2 per cent. Food price inflation continues
to be much higher, at 16.5 per cent, putting what by
now must be an unbearable burden on the common people.
In fact the Reserve Bank of India has already cited
the high rate of inflation as a reason for tightening
monetary policy, making it harder and more expensive
for producers and individuals to access loans.
Presumably, therefore, measures to reduce inflation
ought to be high on the government’s list of priorities.
The current measure suggests that this is far from the
case. An increase in oil prices will not just have a
direct effect on prices (estimated by the Finance Ministry
to add just below 1 per cent to the existing rate of
inflation). It will also have a cascading effect - as
all goods have to be produced using some energy, usually
oil or equivalent, and then transported, so all of their
prices will increase subsequently. So the country will
have to face a further onslaught of inflationary pressure
which is this time entirely policy-induced.
Further, the global prices of petroleum products in
the past three years have been marked by the most extreme
volatility, more than doubling and then falling to nearly
half within a period of 18 months. The fluctuations
hardly reflect ''economic fundamentals'' which have not
changed much in the past few years; rather they show
the impact of global speculative forces on fuel prices.
In any case, they are now rising again, but this does
not mean that these can be treated as benchmark prices
in any meaningful sense. Deregulation means that domestic
prices will now also fluctuate equally wildly.
Clearly, this is the worst possible time to go in for
a liberalisation of petroleum prices, which will inevitably
be associated with rising prices of such goods. What
is the economic logic behind this startling and clearly
insensitive move?
In fact, the UPA government has been trying for some
time to decontrol oil prices, despite the global volatility
in these prices and the lack of convincing arguments
in favour of such deregulation. The Rangarajan Committee
on the pricing and taxation of petroleum products was
set up in the hope that it would recommend such a move.
But that report did not really point to this conclusion;
so the government, not to be thwarted in its desire,
set up yet another committee.
This time it was an Expert Group chaired by former Planning
Commission member Kirit Parikh, with the more or less
explicit mandate to recommend wholesale liberalisation
of the pricing of petroleum products. The Expert Group
duly did just that, and the government has been quick
to accept its recommendations.
The official reason for this move is that it is necessary
to stem the ''losses'' being suffered by the oil marketing
companies (OMCs). When the domestic prices of oil products
are controlled but the price of imported oil is rising,
oil marketing companies receive from the consumer less
than what it costs them to acquire the products they
distribute. This leads to losses (called ''under-recoveries'')
for companies like Indian Oil Corporation, Bharat Petroleum
Corporation, Hindustan Petroleum Corporation and IBP.
But this argument misses the point that all of these
companies deliver a range of products and services,
the prices of all of which are not controlled. In fact,
profits after taxes of the most important oil companies
have remained positive and often quite substantially
so in the past ten years. Under-recoveries are notional
losses that only lower book profits relative to some
benchmark. Thus, there is little danger that the industry
would be bankrupted even if prices were kept at their
earlier levels.
It is true, of course, that the burden of such under-recoveries
should not affect only the books of the oil marketing
companies, but should be shared by upstream oil companies
like ONGC, OIC and GAIL, as well as by the central government
which gets customs duties and excise duties from petroleum
products, and by the state governments which benefit
from sales taxes. This would mean that the oil refineries
should offer discounts when selling products to the
OMCs and government should reduce the taxes it levies
on oil products.
This precise question was examined by the Rangarajan
Committee. It was found that there is indeed an adequate
buffer to shield domestic consumers from the effects
of increases in international prices, so long as segments
that can afford to take a cut in petroleum-related revenues
because they have alternative sources of resource mobilisation
are willing to accept such a reduction. Instead, the
current strategy is one that puts the entire burden
of irrational shifts in the international prices of
oil on the consumer, even if the burden sharing involved
is extremely regressive and the worst affected will
be the economically weakest segments of the population.
So why has the government chosen to do this? The most
obvious reason seems to be that the government has chosen
to favour the private companies that have been allowed
to enter and expand in this sector. This has encouraged
the government to take a measure that will cause great
harm to most of the population so as to bring in more
profits to a few large and powerful companies.
This brings to mind the popular adage: ''Either the government
owns the oil companies, or the oil companies own the
government.''
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