By -Ammar Zaidi :The decision of the Government on June 4 to hike the prices of petroleum products — petrol by Rs 5 per litre, diesel by Rs 3 per litre and LPG (liquefied petroleum gas) cylinders by Rs 50 each — had been long overdue given the steep rise in the international crude oil price that has reached around $135 per barrel (in early June). Moreover, compulsions of managing an economy 75% dependent on imported crude forced the Government to take the decision. In 2007-08 financial year, the country spent $68 billion or Rs 272,699 crore, on import of crude oil. A further Rs 61,504 crore or $15.2 billion were spent on import of petroleum products like LPG. Prices of petroleum products have always been a subject of huge public debate. The policy makers have often been faulted for not freeing its pricing in India. But even the staunchest votaries of market determined price system are mindful of its high potential to cause a spiralling commodity price rise or so to say anything transported. The decision to increase fuel prices was quite difficult in the face of huge rally of prices which even threatened smooth supplies in India unless immediate steps were taken.
The Government tried all possible alternatives to avoid the price hike and in the end agreed for a hike that was less than one-fifth of the raise sought by state-run firms to make domestic cost at par with imported price. Not only that, it left common man’s fuel, kerosene untouched. At Rs 9.09 a litre, kerosene in India is sold at the cheapest rates in the world.
One of the key considerations for a subdued/moderated price increase has been the impact of price rise especially of diesel on the inflation. Though worse was expected, the fuel price rise contributed to the Wholesale Price Index(WPI) a weightage of only 0.79% to the inflation rate of 11.05% in week ended 6th June 2008.
The comments of top Government functionaries are note-worthy as they truly reflect a situation which had left no other solution insight than to pass on to consumers, a small part of tremendous pressure caused by global oil price surge. “We were left with no option,” Petroleum Minister Shri Murli Deora said. “Due to the relentless increase in International oil prices, it has now become necessary for the consumers to shoulder a small part of the increased burden, through a marginal hike in prices.”
Petrol and diesel prices were last raised in February, 2008 when the Indian basket of crude oil was at $67 per barrel. The June hike happened at an oil price of $123 a barrel. “Even after the price hike, our domestic prices are equivalent to $66 a barrel imported cost,” Finance Minister Shri P Chidambaram said, while underscoring the huge gap left uncovered even after the price-hike. We will be able to appreciate the marginability of price hike after taking a look at the need for raising prices just before price hike. The hike needed in June to bring domestic prices at par with International cost was Rs. 21.43 a litre on petrol, Rs. 31.58 per litre on diesel, Rs. 352.99 on every 14.2-kg LPG cylinder and Rs. 35.98 per litre on kerosene.
What actually helped to minimize the impact on the inflation, was the Government’s announcement of a package comprising of a cut in customs on crude oil and petroleum products, reduction in excise duties on petroleum products, and a fresh issue of oil bonds. These measures aimed at helping state-owned oil marketing firms cope with the losses they have had to put up with on account of having to sell fuels at prices much lower than their cost of production. Before the relief package was announced, these losses were estimated at over Rs 245,305 crore this fiscal.
To summarise the details of the package for cushioning the impact of unprecedented rally in International oil prices, an across the board 5% cut was announced in customs duties, bringing rates on crude to zero, on petrol and diesel to 2.5% and on other products like jet fuel (ATF) and naphtha for non-fertilizer use to 5%. Besides, excise duty on petrol was cut by Re 1 a litre to Rs 13.45 and on diesel to Rs 3.60. The hike in fuel prices would give fuel retailers an additional revenue of Rs 21,153 crore, while the Government will forego Rs 22,660 crore of revenues by way of duty cuts. The government was considering issuing Rs 94,600 crore worth of bonds to oil marketing companies.
An important feature of this whole exercise to deal with a gigantic problem was announcement of a further subsidy to the oil-marketing firms from other public sector firms that produce oil. This will reduce their losses to a little more than Rs 45,000 crore. Since State petroleum levies are on an ad-valorem basis, some States, such as Maharashtra, West Bengal, Kerala and Andhra Pradesh, immediately cut sales tax to restrict the retail price rise to the minimum. The fervent call by the Prime Minister Dr. Manmohan Singh on the day of price hike (June 2004) followed by an appeal by the Petroleum Minister Shri Murli Deora next day, had soothing effect as several other States followed suit after the Government made a strong case for burden sharing by all stake-holders. Obviously States are an important group of stake-holders levying high Sales Tax generally in the range of 20-30% on petrol and diesel.
In addition, the Government also constituted a committee headed by former Cabinet Secretary Shri B.K. Chaturvedi to examine the impact of increase in oil prices between 2004-05 and 2008 on the financial health of all state-owned oil companies. It has been asked to analyze the cash flows and the profitability of all three groups of companies and would also revisit the concept of “under recoveries”. This Committee, it is expected, would come up with suggestions which should facilitate a pricing policy which assures both health of oil PSUs as also protects consumers against extreme volatility.
While the Government had reluctantly raised fuel prices, smaller countries have shocked their drivers into conservation by raising prices sharply to ease the burden of subsidies. Asia’s third largest consumer has chosen to maintain a far steadier, gentler approach. The decision to raise petrol and diesel prices by about 9% with effect from June 5, 2008, just pales into insignificance when compared with other countries. Indonesia’s 29% rise, and Malaysia’s decision to hike petrol prices by 41% and diesel prices by a sharper 63% have been much sharper increases. Taiwan and Sri Lanka too announced higher price increases. Even in the US, whose prices are relatively cheap by world standards, pump prices have trebled since 2004 to $4 (Rs170) a gallon.
International crude prices continued to climb after the June 5 price hike and touched $147 a barrel. This has forced Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) to continue to incur a loss of Rs 16.70 a litre on petrol, Rs 27.61 on diesel, Rs 38.09 on kerosene and Rs 338.53 per cylinder on LPG. March 1998 – May 2004 saw 195% increase in price of Indian basket of crude oil as against a much higher increase of 284% during May 2004- July 2008. The retail selling prices were increased by 258% for PDS kerosene, 78% for domestic LPG, 112% for diesel and 48% for petrol during March 1998 and May 2004 as against lower increase of 0.9% for PDS kerosene, 26% for domestic LPG, 60% for diesel and 50% for petrol.
But the Government seems steadfast in protecting the interests of the common man, going by the high rate of inflation that the country is facing crude prices movement in the International market will continue to be watched carefully.
*Special Correspondent, PTI, New Delhi