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Oil Price Hike

Oil Price Hike

Once again, high fuel prices are in the news. It is almost as high as it was three years ago when the BJP was in the opposition. And, undoubtedly, the government was criticised severely by the opposition party, which, incidentally is the ruling party now. Does it mean that when the opposition gets on to the seat of the ruling party, the whole philosophy changes? Alas, no one cares a hoot about inflation, the poor and the middle class, the much-touted words in all election manifestoes.

The above inference seems to be correct, considering the statement made by KJ Alphons alias Alphons Kannanthanam, the newly crowned Minister of State for Tourism and Information Technology. The minister who belongs to Kerala asked, “Who buys petrol? Somebody who has a car, bike. Certainly, he is not starving. Somebody who can afford to pay, has to pay."

He justified the surge in the prices by claiming that the extra money is used for the welfare of the poor and the downtrodden. The government has to provide housing to the poor and electricity in every village, which requires a lot of money. Perhaps, he wants us to believe that the government is taking money from the rich and passing it on to the poor. It is heartening that someone in the government thinks like Robin Hood.

But, then, Mr. Robin Hood must understand that petrol prices have a cascading effect on the overall inflation, both retail and wholesale. CARE, a rating agency, in one of its recent reports has mentioned that a 10 per cent hike in the price of crude oil translates to 0.5 per cent increase in the wholesale price index (WPI) and around 0.15 to 0.2 per cent increase in the consumer price index (CPI). Simply put, even if the fuel prices are increasing gradually, they are contributing to inflation.

A report published in 2013, especially notable for the petroleum ministry, revealed that 58.45 per cent of the diesel is consumed for public transport and commercial vehicles, 14.11 per cent for agricultural activities and 8.22 per cent for industry.

In other words, more than 80 per cent of diesel is used for activities that add on to the gross domestic product and have an indirect implication on the budget of the common man as things of daily use get expensive. And less than 20 per cent of the fuel is used for private consumption.

In these four years, despite the promise of ache din, this proportion does not seem to have changed to an appreciable extent. To say that only the affluent buys fuel and gets affected by the rise in prices is misleading. The statement has certainly been made to cover up what the government has been doing over the last three years.

Let’s have a look at what transpired over the last three years as far as fuel prices are concerned. The fact is that the Modi government has been exploiting the low crude oil prices for fiscal consolidation.

The monthly average price of crude oil declined from $107 a barrel in May 2014 to $28 a barrel in January 2016, till it went up to $55 a barrel in September 2017. In other words, the cost of crude oil is still very low, compared to what it was when Modi took over as Prime Minister. However, the petrol and diesel prices today are much more than they were in May 2014.

During May 2014 to January 2016, the government has increased excise duty on petrol and diesel by 127 per cent and 387 per cent respectively in 11 different tranches. The states also levied value added tax (VAT) as per their respective state Acts. The government was able to collect taxes amounting to Rs. 4 lakh crore during 2016-17. Certainly, this money helped in reducing the fiscal deficit, while the oil companies, too, recovered their losses. But the government had no strategy to deal with a rise in crude oil price.

Jaitley and company did not foresee this situation. After January 2016, the crude oil prices started increasing but the government did not reduce the taxes as it seems to be a difficult option. While the government seems to have no solution, the opposition has sprung into action and has started a signature campaign for raising voice against the rising fuel prices.

The petroleum and natural gas minister, Dharmendra Pradhan, could only come up with a statement anticipating a dip in prices during Diwali. But there seems to be no logic behind this seemingly promising quote.

Another theory that the government has been propagating is that international crude prices have increased and hence the hike in fuel prices. To some extent, the theory is correct, especially since June 2017, when this system of daily pricing was introduced.

The petrol price in the national capital rose by 7.5 per cent from Rs. 65.48 per litre on June 16, 2017 to Rs. 70.38 a litre on September 13, 2017 and that of diesel by 7.8 per cent from Rs. 54.49 a litre to Rs. 58.72. If we compare the crude prices during the same period, we will find an increase of 10 per cent from $48.4 to $53 a barrel. Taking into account the slight appreciation of 0.5 per cent in exchange value of the rupee, the effect should be around 9 per cent on the petrol prices. Does it mean that the petrol prices have not been increased to the extent crude oil prices have risen internationally?

Here comes the twist. The oil companies do not take into account the actual cost incurred for procuring crude oil, refining and making it available in the market while deciding the fuel prices on a daily basis! Rather, the pricing is based on an entirely different formula called trade parity price (TPP). TPP is basically the weighted average price of import parity price (IPP) and export parity price (EPP), where they are given a weight of 80 and 20 respectively.

IPP is the price the importers will actually pay in case they import crude oil. Likewise, EPP is the price the oil companies will get in case they export the product. Since imports are more than exports, import is given more weightage than exports. The final TPP will also include the freight charges, marketing costs and also the taxes that both the Centre and the State levy.

Since the fuel prices are determined daily, TPP should also be calculated daily. However, so far, it has been calculated after every 15 days i.e., TPP remained the same from June 16 to June 30 and was recalculated after every fortnight. In other words, even though daily pricing was introduced, the oil companies continued to follow the old system of calculating TPP and using the same figure for 15 days. Now the question is how and why the fuel prices are being changed daily? Where the money that the oil companies earn over and above the TPP go?

Clearly things look fishy. It seems the oil companies are filling their coffers at the cost of the common man. As far as price determination is concerned, there is no clarity. The website of the petroleum ministry still has the old method of price calculation. As such, no new method of calculating price has been devised. It is a pity that the government that has been speaking a lot about transparency, has nothing much to offer.

It is only concerned about revenue generation and the so-called fiscal consolidation. The poor and the middle class will only come into picture in 2019, when India Inc. goes in for the next Lok Sabha election. The promises that Modi made in 2014 that every Indian would get Rs. 15 lakh have all been forgotten. Like change, petrol price hike is also a constant.

The writer, a company secretary, is director, communication, Deepalaya, and can be reached at  

(Published on 24th September 2017, Volume XXIX, Issue 39)