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Petroleum Prices

Petroleum Prices

It is said that history repeats itself. It was exactly six years ago, when   Narendra Modi, the current pradhan sewak, urged the then prime minister Manmohan Singh to recall the sudden hike of Rs. 7.50 in petrol price considering the plight of the common man. To be exact, he said, the petrol price hike, “shows the incompetence of the government” in tackling the economic crisis effectively.

While the former prime minister had to struggle with rising crude price at the international level, Modi had, comparatively, been lucky. Since September 2014, the international crude price had shown a dip consistently from as high as $100 a barrel to less than $30 a barrel. Yet Modi, who was so concerned about the common man in May 2012, did not take any step to reduce the prices during the last three years when crude prices were very low.

Instead, the government increased the excise duty 11 times on petrol and diesel on the pretext of refurbishing losses incurred by the oil marketing companies during the UPA tenure. The only time when it reduced the price by two rupees was in October 2017, just ahead of the Gujarat elections, albeit to please the voters.

While answering a question in October 2015 why the government has not reduced the prices commensurate with the international crude prices, Modi said that the country had passed through a very bad phase due to drought.

Thanks to international oil prices, the fiscal deficit that stood at 4.5 per cent of GDP in 2013-14 reduced to 3.5 per cent last year. Similarly, the current account deficit reduced considerably and foreign reserves shot up. The government not only earned higher revenue in terms of indirect taxes but also got higher dividend, being the largest shareholders in the oil marketing companies (OMCs).

It was a win-win situation until a few months ago. It seems, crude oil, the all-time-friend of Modi, has started showing its second face. There has been an increase of 25 per cent in crude oil price during the first three months of 2018. It rose to $80 a barrel recently and has been sending ominous signals to the country, considering the fact that India imports 80 per cent of its oil requirements. Rising oil prices indicate inflation and also a dip in currency, something that the government would have never thought of in the run-up to the elections.

According to one estimate, every $10 increase in the oil price affects India’s current account deficit (the gap between exports and imports) by 0.4 per cent of the GDP, increases inflation by 30 to 40 basis points and hurts growth rate by 15 basis points. In other words, this is a testing time for the Modi government.

During the UPA regime, despite the fact that the crude prices touched $150 a barrel, the government kept the retail consumer almost insulated from the international prices. The oil companies were asked to absorb the loss. The government paid the oil companies for some of its notional loss, while the rest was borne by these companies. It is a different matter that the formula for calculating the notional loss was criticised a number of times as many were of the view that the under recoveries were inflated.  It was only towards the end of its term that the retail prices were deregulated.

When the Modi government took over, it reduced its fiscal burden considerably as the OMCs were given the freedom of fixing the retail prices. The companies were able to make profit as retail prices were not reduced. This also reduced the subsidies that were given to these companies. There were many who appreciated the government’s policy.

 

A year ago, when everything was brought under GST, five crucial petroleum products remained unaffected. When the crude prices started rising last year, the ministries of petroleum and natural gas and finance blamed the states for the complex pricing structure. It showed that the government wanted to shift these products to GST but the state government did not agree.

The finance secretary at that time, too, denied a cut in excise duty on the plea that the revenues are being shared with the states as well. On the other hand, the government wanted the states to cut other taxes that are levied at their level to reduce oil prices. Now who would like to reduce his revenue? Things continued and the government is now in a huge dilemma -- to ask the OMCs to bear losses or to pass on the entire cost to the retail consumer. Petrol crossed Rs. 80 in Mumbai last week and diesel is not far off.

However, at this stage, asking the oil companies to shave off their profits could also be tricky for the economy. It would be undoing the policy that the government adopted since 2014. Their performance over the last three months has already taken a dip, which is evident in their stock prices. It would be equally risky if the retail consumer is asked to bear the entire burden. Only time will say what the new policy will be.

We also saw a new trend emerging in view of the recent elections held in Karnataka. While international prices started rising, the OMCs were asked to freeze fuel prices. The companies, which were changing fuel prices on daily basis, considering the fluctuation in international prices, had to fix the fuel price, in an attempt to woo the voters in Karnataka.

For 19 days, the oil companies did not change the price that, too, when international prices were increasing every day. It is estimated that the average marketing margin for these companies has gone down from Rs. 3.5 per litre on April 1 to Rs. 1.9 per litre on May 1. This is a sharp cut of around 45 per cent in a month.  

Considering the fact that elections will be held in states like Rajasthan, Madhya Pradesh and Chhattisgarh, the government may exercise its power of controlling the oil prices again and again.

Does this mean that the government policies are way too flexible? And it can go against its own policy merely for winning elections? It certainly has to choose between fiscal prudence and angry voters. In view of the past experience, it seems the latter will have more weightage than the former.

Considering that there has been a rise in demand for oil while the supply has shrunk globally due to many factors including the latest decision taken by the US to exit the Iran nuclear deal affecting supply of 1 million barrels in a day, the prices are not expected to go down in the near future. Also, OPEC has strategically cut its inventories since 2017 with an aim to increase oil prices. In February 2018, it also hinted at collaborating with other oil producing countries, including Russia, to further increase prices.

While the prices were low, the government should have reduced its deficit sharply. Instead, it increased its expenses by increasing the salary and pension entitlements massively. Also, the economy suffered from the sudden shocks of GST and demonetisation. At a time, when the country was on the verge of revival, oil has given a big shock. It did not learn any lesson from the troubled waters that UPA-II went through, despite the fact that it could increase its revenue considerably.

All said and done, it is evident that India will continue to suffer until it finds an alternative to oil. We have been hearing a lot that India will soon be a zero-oil importing country. But how soon this soon is? No one knows. The fact of the matter is that we are still dependent on oil. And it can play havoc by kicking inflation and disturbing fiscal maths in a few months.

Of course, Modi will blame the global trends. But, then, the fact is that he is solely responsible for his ill-conceived policies and misadventures.

(The writer, a company secretary, can be reached at jassi.rai@gmail.com )

(Published on 04th June 2018, Volume XXX, Issue 22)