Oil sector

Austerity’s pain

Print edition : February 22, 2013

At an Indian Oil outlet in Ahmedabad on January 17, when the government allowed oil companies to hike diesel prices. Photo: Amit Dave /REUTERS

State Transport Corporation buses filling diesel from a private outlet in Cuddalore, Tamil Nadu. Bulk consumers have to buy the fuel at market prices now. Photo: C. VENKATACHALAPATHY

The introduction of a dual pricing mechanism for diesel will compel bulk consumers to buy the fuel at market prices, and the overall impact of this on inflation cannot be underestimated. Reducing fiscal deficit cannot be an end in itself.

THE recent move of the United Progressive Alliance (UPA) government to partially deregulate the price of diesel has been conveniently framed within the discourse on austerity—it is made out that the measure was vital to rein in the fiscal deficit by controlling an ever-expanding “subsidy bill”. While this “bold” reform measure has been welcomed by the oil marketing companies and some sections of the media, the end-users of diesel, especially bulk consumers, have voiced genuine fears that the step will stoke inflation and be particularly harsh on the common man.

On January 17, the government allowed the oil marketing companies to hike diesel prices by 45-50 paise a litre every month for retail consumers so as to reach market price levels in 18 months. It also decided to deregulate the price of diesel for bulk consumers, which essentially implies a hike of Rs.11 a litre. The bulk consumers of diesel include the Railways, public transport, cement and power sectors.

Minister for Petroleum and Natural Gas M. Veerappa Moily defended the move and ruled out the possibility of a rollback. The government’s rationale to go ahead with this “reform” as a way of cutting down on public expenditure has obfuscated the real crisis of overpricing and lack of affordable energy in India. The push to align domestic diesel prices with international crude oil prices does not take into consideration the ground realities of an energy-deficient country where a large section of the population still does not have access to modern fuel. The constant emphasis on subsidy deflects attention from the revenue earnings of the government through taxes imposed on the sale of petroleum products. The introduction of a dual pricing mechanism for diesel will compel bulk consumers to buy the fuel at market prices, and the overall impact of this on inflation cannot be underestimated.

The main opposition party, the Bharatiya Janata Party (BJP), as well as other political parties have criticised the government’s move. Prakash Javadekar, BJP spokesperson, said that the move would have a “cascading effect” on the prices of commodities. The Central Committee of the Communist Party of India (Marxist) slammed the decision by saying that it would impact farmers adversely and increase inflation. Even parties such as the Samajwadi Party, the Bahujan Samaj Party and the Rashtriya Janata Dal that back the UPA have demanded a rollback of the hike.

Under-recovery and taxes

While the government constantly stresses the total amount of subsidy going out to the petroleum sector, enough attention has not been given to the total amount of revenue earned through taxation of petroleum products. As per a report published in Economic & Political Weekly on March 27, 2010, the total amount of government receipts on petroleum products in 2008-09 was Rs.1.16 lakh crore. This information, which used to be collated by the Petroleum Planning and Analysis Cell, is no longer available in the public domain. A senior bureaucrat with the Petroleum Ministry, speaking on condition of anonymity, pegged the total amount of tax collections in 2011-12 at about Rs.2 lakh crore.

Speaking to Frontline, Prabir Purkayastha, a member of the Delhi Science Forum, questioned the government’s contention that it heavily subsidised petroleum products. “The so-called subsidy on diesel is not a real subsidy, but only a presumed under-recovery. The calculation of subsidy does not take into account the taxes collected by the government. The taxes on diesel are charged ad valorem, so the amount of taxes goes up with the prices. What the government could possibly have done is to restructure the tax structure on diesel,” he said.

Purkayastha also questioned the logic of aligning the price of diesel with the international price. “Though we do import crude oil, not all of our resources are imported. About 20-25 per cent of our energy needs are met from internal resources, and this needs to be factored in any consideration of pricing.”

Vivekanand Tripathi, a former official with Bharat Petroleum Corporation Limited (BPCL) and a member of the Forum in Defence of Public Sector, said the sources of revenue for the government through petroleum products had not been adequately highlighted. He said: “The Oil and Industry Development Board, founded in 1974, has collected Rs.99,248 crore as cess on petroleum products. The mandate of this organisation was to make India self-reliant on the energy front. As per official sources, only Rs.902 crore has been spent so far on research and development purposes by the board.”

Swadesh Dev Roye, general secretary of the Petroleum and Gas Workers’ Federation of India, said, “The term ‘under-recovery’ is a misnomer as it only denotes the difference between a notional price of fuel and the price that the oil marketing companies are actually getting. Do you see any losses in the balance sheets of oil marketing companies in the last financial year?”

Indian Oil Corporation registered a profit of Rs.3,954.62 crore for the financial year 2011-12. The other two major public sector oil companies, Hindustan Petroleum Corporation Limited (HPCL) and BPCL, registered profits of Rs.911 crore and Rs.851.28 crore respectively. Though the companies witnessed a decline in profits compared with the previous year, none of them suffered losses.

Another oft-cited argument to do away with the subsidy on diesel is that it merely helps a large section of the rich and the middle classes who do not require the subsidy. However, this does not take into account the fact that public transport is heavily dependent on diesel and any increase in its price affects the common man. Purkayastha explained, “In fact, the plea to stop subsidy to diesel cars is being used to sabotage the subsidy made available to public transport.”

Impact on inflation

The dual pricing mechanism introduced to align the price of diesel fuels for bulk consumers with market prices can impact inflation and have a cascading effect on people in general. At the same time, it may be read as a covert move to enable private producers of oil to occupy a larger market share.

Vivekanand Tripathi noted, “The Railways, the transport sector, the cement and power sectors, and mines are all bulk consumers of diesel. The increase in prices by these sectors will eventually affect the common man. A large number of retail outlets of producers such as Reliance and Essar are non-operational now. Reliance has about 1,400 retail outlets and Essar about 1,500 outlets selling petroleum products. As of now, only 20-25 per cent of their outlets are operational. If the price of diesel is aligned with the market price, it will help these companies bag a larger market share.”

Both Reliance Industries Limited and Essar Oil welcomed the partial deregulation of diesel.

Swadesh Dev Roye saw the move as an extension of the anti-people policies of the government, which include the introduction of foreign direct investment (FDI) in multi-brand retail. He said, “Has market-based pricing worked in the electricity sector? Has the price of electricity gone down after deregulation? Then why does the government assume that it will work for diesel?”

The government, however, has downplayed the concerns regarding inflation. Speaking to this correspondent, a senior official in the Ministry of Finance said, “Any major reform is bound to have a short-term impact on prices which will eventually even out. The common people will ultimately benefit if there is more flexibility in energy pricing.”

The public sector oil marketing companies have also welcomed the move towards deregulation. The move to decontrol is being seen as a necessity to make them and other public sector undertakings (PSUs) more competitive and profitable.

Ashok Singh, a former chief regional manager with HPCL, supported the move to decontrol diesel. He said, “The National Democratic Alliance government’s move to completely deregulate the prices of petroleum products was a welcome move. It improved the quality of service to customers. After all, competition improves services. Following deregulation, oil PSUs were able to attract better talent. I saw a lot of enthusiasm among sales officers in the Mumbai region to meet targets from 2004-2006. HPCL had about 150 outlets in the region. There were efforts to attract and retain customers; surveys on customer satisfaction were regularly carried out at retail outlets. I think all stakeholders will benefit from opening up the market, and it was a wrong decision on the part of the UPA government to bring back the administered pricing mechanism. The partial decontrol of diesel is the correct move.”

On the possible impact on inflation, he said, “The market will take some time to stabilise but eventually competition will improve services. The market will stabilise within six months or so. Besides, you have to consider the fact that even for petroleum products that have been deregulated, the oil PSUs give discounts on bulk purchases.”

Other means of revenue

While the government has termed the move to gradually cut down the subsidy burden as an unavoidable step in achieving fiscal consolidation, sections of civil society and economists have cautioned against ignoring the social implications of such large-scale cutting down of public expenditure.

Subrat Das, executive director of the Centre for Budget Governance and Accountability, highlighted alternative means that could be used by the government for resource mobilisation. He said, “The decontrol does have the potential to aggravate inflation. Another way of fiscal consolidation would be to reprioritise spending and think of alternative ways of resource mobilisation. The tax revenue earned from direct taxes is still very low. In 2011-12, the estimated amount of total tax as a percentage of the GDP [gross domestic product] was about 16.64 per cent. The combined tax to GDP ratio of G20 countries excluding India is about 22-27 per cent.

“Also, India relies more on indirect taxes than on direct taxes for its tax revenue. Of the total tax collections, about two-thirds come from indirect taxes and one-third from direct taxes. Indirect taxes have a disproportionate impact on the poor and the middle classes and there is the problem of double taxation too. The government can think of expanding its fiscal policy space through measures that do not hurt the poor.”

Too much austerity as a means of fiscal consolidation is now being widely questioned as a policy move. A working paper of the International Monetary Fund (IMF), co-authored by Olivier Blanchard and Daniel Leigh, released in January 2013, found that in advanced economies, stronger planned fiscal consolidation had led to lower growth than expected. The paper comes with the disclaimer that the authors’ views should not be interpreted as representing the views of the IMF. However, the thrust of the paper does signal a significant shift in the thinking on public expenditure even in multilateral institutions that were strong proponents of controlling government spending. In this context, the UPA government needs to carefully measure the potential impact of its major policy decisions on the common man without thinking of the fiscal deficit target as an end in itself.

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