India's
oil marketing majors (Indian Oil Corporation, Bharat
Petroleum Corporation and Hindustan Petroleum Corporation)
have gone defensive. They have they decided to partially
roll back, to the extent of Rs. 1.68 per litre, the
petrol price hike of Rs. 6.28 a litre (excluding VAT/Sales
Tax) announced in May. They have also launched a campaign
to correct the ''false impression'' that they are making
huge profits and incurring excessive administrative
costs. The immediate provocation is the combination
of public anger at the recent petrol price hike, political
opposition both within the UPA and outside, and criticism
even from UPA Cabinet ministers like A. K. Antony and
Vayalar Ravi that it is difficult to justify the price
increase when the oil marketing companies (OMCs) are
making high profits.
The case made by the public sector oil marketing companies
is along expected lines. The rise in international oil
prices and the depreciation of the rupee would have
resulted in huge losses in their books, they argue.
This did not transpire only because of the support provided
by the government and the upstream oil companies (ONGC,
OIL and GAIL) in the form of financial assistance and
lower prices. Even after that support the profits recorded
in their books is not as large as is being presumed,
given the capital and other expenditures they would
have to incur. This is because they (the OMCs) have
over time absorbed part of the increase in oil prices
by lowering their margins. In the event, the cost of
crude imported from abroad and bought from domestic
companies has come to constitute 92 per cent of total
costs. This, according to the official statement from
the OMCs, indicates that administrative costs are not
too high, which it does not.
There is much reason to believe that the OMC managements
protest too much. However, what can be said in their
favour is that they are not the only forces that have
worked to transfer a larger share of the burden of high
international oil prices and a depreciating rupee onto
the consumer. Rather, a range of interests-governments
at the centre and the states, the upstream oil companies
and the OMCs-have been constantly resisting the erosion
of the absolute receipts they receive from the oil economy
and working to increase the volume of those receipts.
This is easy when the rupee price of imported oil is
falling, because end-product prices are only partially
adjusted downwards (if at all) and that too with a lag.
The problem arises when international oil prices are
increasing. To the extent that petroleum product prices
are not adjusted upwards, the agents absorbing a part
of the margin between the cost of imported ''inputs''
into the petroleum economy and the price of end products
suffer erosion in receipts and even losses. One way
to partially neutralise that effect is to raise end-product
prices and transfer the burden onto the consumer. Politics
determines the extent to which this can be done, even
when fairness requires that it should not. Failing such
an increase, there is need to redistribute the burden
among the other agents involved, with the outcome determined
by the relative clout of each of them. On this occasion
the OMCs are being called upon to bear more than what
they think is their fair share.
However, the one agent with some flexibility here is
the government. It can accept erosion in net receipts
from oil by reducing taxes on petroleum products or
increasing subsidies to rein in their prices because
it has the option of mobilising additional resources
from taxation. In exercising that option it would also
be redistributing the burden of a global oil price increase
among a larger number of agents. Unfortunately, the
government's policy seems to be one of transferring
as much of the burden as is politically possible onto
the final consumer and then letting the relative clout
of lobbies within the petroleum economy to determine
the rest.
The result is no firm policy and no inner consensus
on dealing with rising global oil prices. As a result,
the UPA seems trapped in a debate that goes nowhere.
That debate, as in the past, relates to which set of
agents should bear the burden of those adjustments and
how the burden should be shared among them. At the moment
the OMCs are at the receiving end of that debate. As
noted earlier, this is not a new question. It has surfaced
often before and especially in 2007-08 when global oil
prices crossed the $100 mark. But there is a difference
between then and now. During financial year 2007-08,
while the dollar price of oil imports rose, the rupee
too appreciated. So the rupee price of imported oil
did not rise proportionately. India was partly insulated
from the effects of the global oil price hike because
of the gain the rupee registered vis-à-vis the
dollar. This time, however, as the dollar price of oil
rises and/or hovers at relatively high levels, the rupee
is depreciating, pushing up the rupee price of imported
oil even further. Moreover, in periods when the increase
in the dollar price of imported oil is halted or even
reversed, the rupee price often continues to rise because
of depreciation. Thus the adjustment that has to be
made domestically is much larger and longer term than
even the dollar price increase warrants.
It hardly bears stating that domestic policy cannot
be held responsible for increases in the international
prices of oil. While the changing demand-supply balance
in the global oil market may play a small role here,
much of the increase is on account of geopolitical factors
such as the US stand off vis-à-vis Iran as well
as the role that speculative finance is playing in oil
or oil-linked markets. However, when it comes to the
rupee's value, policy does play a role. Even if the
global crisis, through its effects on trade and capital
flows, is blamed for the depreciation of the currency,
there are ways in which the government could have acted
to contain the rupee's decline. So, unlike 2008, the
government must take part of the blame for changes in
the rupee price of imported oil-a factor many would
argue has to be taken account of when dealing with the
burden-sharing issue.
However, issues such as these have been obfuscated by
the propaganda barrage that has been unleashed for some
time now, which focuses on the ''economic irrationality''
of protecting consumers from the effects of oil price
increases with the aid of budgetary subsidies. That
campaign was and is part of the neoliberal drive against
all forms of subsidies and in favour of deregulating
prices and allowing them to ''find their level''. The
campaign ignores, of course, the fact that the price
we are talking of here has little to do with the ''undistorted'',
mythical price that an ideal market is presumed to deliver.
But its arguments are being used by sections that want
to contain the erosion of their share of receipts from
the oil economy. In the event, the erroneous conclusion
being advanced is that the issue of adjustment to changes
in international prices arises at all only because of
the fact that the domestic prices of end products are
not allowed to automatically adjust.
Sections of the government had presumed that the difficulties
of getting the consumer to pay had been partly resolved.
India, in principle, had shifted out of an administered
pricing mechanism for petrol and other products, leaving
the price fixation and burden sharing issue only to
a few commodities like diesel, LPG and kerosene. That
shift was justified on the grounds that petrol is consumed
directly or indirectly (in the form of costs of intermediates
or hired transportation, for example) only by the more
well to do in the population. So dropping explicit or
implicit subsidies on petrol was expected to target
actually provided subsidies better.
What the current controversy over and the partial rollback
of the recent petrol price hike indicate is that the
battle is by no means over. Petrol prices could not
be raised before the recent elections to state assemblies.
And the increase announced after the elections is being
reversed. The controversy also makes it difficult for
the government to reduce subsidies on diesel, LPG and
kerosene, without which the problem of burden sharing
remains despite the petrol price increase.
Thus the debate continues over the extent to which the
government must rely on any of the five different alternatives
available to it when adjusting to what is a combined
oil and currency shock. These alternatives are that
of: (i) raising retail prices; (ii) reducing duties
to keep retail prices unchanged, while transferring
the benefits of the duty reduction to the oil marketing
companies; (iii) generating revenues by taxing the super
profits of the oil companies that are involved in the
production and export of crude at the current high prices,
so as to compensate the marketing companies; (iv) generating
resources through additional taxes on or lower tax concessions
for India's high net worth individuals and the corporate
sector, so as to pay for subsidies that protect the
ordinary consumer against the effects of the global
oil price shock; and (v) borrowing money to compensate
the oil marketing companies for their losses.
The government's belief that it can push through and
sustain an increase in end product prices is being challenged.
The difficulty is that, if relied on solely, the price
hikes required are by no means ''moderate'' and their
effects are felt on top of the already high burden of
rising inflation. What is more sensible and fair is
to opt for a combination of the other available means
of adjusting to the oil shocks, so as to keep prices
constant. Some state governments did reduce duties on
petroleum products, but given their financial position
this is not a viable option for others. It also amounts
to getting the state governments to implement policies
that the Central government is unwilling to adopt itself.
Moreover, it amounts to the use by the Congress of the
control it exercises over a few state governments to
create a political atmosphere where popular anger against
the price hike is turned against opposition-controlled
state governments and deflected away from the Centre.
But as the Kerala experience suggests even that is not
a workable strategy. The government seems to have no
option other than addressing the oil price hike with
a combination of subsidies and new taxes. But that requires
easing the grip of neoliberal thinking over the UPA.
*
This article was originally published in the Frontline
Volume 29 - Issue 12:: Jun. 16-29, 2012.
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