Why the BJP & CPM are wrong on fuel price hike

BHAMY V. SHENOY writes: It is not so obvious, but when the BJP and the Left parties clamour for the reduction in petrol and diesel prices, they are indirectly asking the Congress-led UPA government to reduce the assistance to the poor in the areas of health, education, rural employment guarantee scheme, etc. Can that be good?

On the surface, it looks as though the protestors want to hold the prices to help the poor. However, when you take into consideration those who can afford vehicles, it becomes al too clear that political parties are helping mostly those who can afford to absorb the increased prices.

The truth is, 50 per cent or more of our population earns less than two dollars a day. They lead a life of mere subsistence. And they are not affected by the hike petrol prices directly or indirectly, except through the possible effect inflation can have on the end-products they consume.

For the sake of argument, let us assume that we as a society will decide not to impose any taxes on petrol and diesel. Then we can sell petrol and diesel for about Rs 27 per litre rather than the current price of Rs 55 per litre.

This will make oil companies happy since such a pricing policy will allow them to recover their refining and marketing costs. This will make petrol customers happy because their chosen fuel now costs so little. 

However, such low prices will be a disaster for the poor of the country.

How will we be able to subsidise kerosene supposedly to help the poor (the fact that a significant portion of it is sold in the black market is another issue)? Kerosene is sold at Rs 9 per litre through the Public Distribution System (PDS), which is at least Rs 18 per litre less than the cost price today. 

Even LPG used mostly by the rich and the middle is also subsidised to the extent of Rs. 115 per cylinder. Who will absorb the loss on LPG? 

Theoretically, the price of petrol based on cost of supply should be higher in Delhi than in Bombay. However, while petrol costs Rs 47.51 per litre in Delhi, its cost is Rs 53.50 per litre in Bombay. This huge difference of Rs 7 per litre is mostly because of different state taxes. Diesel per litre costs Rs 39.96 in Bombay, whereas it costs Rs 32.47 in Delhi.

No opposition ruling party is prepared to “protect” the hapless consumers by reducing their taxes while they protest vehemently against the price increase. Is this hypocrisy or concern for the poor?

Currently, the central government collects about Rs 57,000 crore per year from annual petrol sale of 9 million metric tons and diesel sale of 42 million tons in the form of customs, and excise taxes. Revenues collected by the State from petrol and diesel amount to Rs 49,000 crore per year in the form of sales and entry taxes. Thus the oil sector is a big contributor to annual budget of the Centre and the States.

No government can afford to forgo such a high amount of taxes from petroleum products.

All over the world with the exception of oil producing countries—for such reasons as reducing green house gases, energy security, to promote the use of alternate fuels, etc—it is the petroleum sector which is taxed high to support the social and developmental programmes of governments.

The same rationale, with minor variations, is behind the pricing policy in India. About 50-52% of petrol price is accounted for by central and state taxes whereas that percentage for diesel is about 35%. Crude oil price, which is the big component after taxes of the pump price for petrol, is determined by international market. India with its less than 3% of the market share can hardly influence the crude oil market. 

Because of the potential opposition to any price increase and impending elections, the ruling UPA did not allow any crude oil price to flow through since the last price increase in September 2005. It forced oil companies to absorb losses which were running at more than Rs 200 crore per day.

At this rate even the best managed companies will go bankrupt. It is not in the nation’s interest to allow the navaratna companies to face such a bleak future. The government was also hoping that crude oil market will come down. In the event it did not. Finally after waiting for eight months, the government allowed an increase of Rs 4 per litre in petrol and Rs 2 per litre in diesel.

The central government or the state government or both can forgo this price increase by easily lowering their taxes. In the case of central government the tax for petrol is Rs 17 per litre and Rs 7 per liter for diesel. For the state government those numbers respectively are Rs 13.4 and Rs 7.4 in the case of Karnataka.

When the NDA government increased prices, it was opposed by the Congress. Now when the Congress-led UPA increases prices, the BJP is opposing the increase. Both these parties know full well the reason for such an increase and they also know that by decreasing the tax rates, it will only hurt the welfare programs. Still to secure political mileage they go through these dramas.

The only way one can avoid these unproductive and disruptive protests is for the government to get out of the process of setting the petroleum product prices. When the administrative price mechanism (APM) was dismantled in 2002, it was hoped that the market would set the prices.

Unfortunately, our political class does not want to give such enormous power to the market despite the obvious problems the ruling party faces while trying to increase the price. This is because it gives the ruling party enormous opportunities to monetize such power.

At the stroke of a pen wielded by the petroleum minister, big sums of money can be arbitrarily transferred from oil producing companies to oil marketing companies in a non-transparent manner. Which politicians would like to lose such power? 

Oil is considered as a curse in the case of oil producing countries because of the opportunities it provides to collect huge amount of bribes. In the case of India which is not a producing country, oil sector is still a curse. This is because of the deliberate policy of the government to interfere in the market in the name of serving people. This has resulted in the government losing as much as Rs 42,000 crore per year because of misuse of subsidies and adulteration.

Even the planning commission has recommended to adopt new pricing policies, but there is no interest on the political side. Instead of fighting against such corrupt practices and exposing them, the opposition parties are taking the easy way out of protesting the legitimate price increases foisted by the international crude oil market in a mechanical manner.