People's Democracy

Myth and Reality of Oil Price Hike

Nilotpal Basu

COMPLETING three years in office in course of a five-year tenure should indeed be an occasion to celebrate; more so if this happens to be the second avatar under the leadership of Prime Minister Manmohan Singh. But it did not turn out exactly that way. In fact, public perception about the UPA-2 has reached almost its nadir on the third anniversary. But, as if this was not enough, a day after the budget session of the parliament had come to a close, the oil companies announced the heftiest hike in the price of petroleum in the history of this country. And all hell broke loose.

The sharp reaction across the political spectrum, and importantly among the people against this move was primarily because it was perceived as grossly insensitive. The day the hike was announced was preceded by a week which clocked food inflation at over ten per cent .The people are literally on the brink. There was almost a sense of disbelief at the savagery of the quantum of hike. And experience prompted them to believe that there will be a ‘cascading effect’ and lead to further upward spiraling of the food and other essential commodity prices.

Surely, the government appeared to be stunned by the magnitude of the opposition to the move. Not only the opposition, but even the constituents of the UPA and those who had been supporting the government and had been specifically rallied for a grandstanding on the anniversary celebration came out strongly. Perhaps, the depth and sweep of the opposition, is in itself a reflection of the unacceptable nature of the government’s move. And for sure, the timing of the hike left it to nobody’s imagination that this move, notwithstanding the government’s vehement denials, indeed had their blessings. The compulsions of avoiding negative fallout in the assembly elections and the passage of the budget dictated its precision.

THE MYTH OF “LOSS”

OF OIL COMPANIES

This brings us to the million dollar question as to why the government chose this collision course. The government and its economic policy mandarins tried to paint it as inevitable to save the public sector oil companies from ruination. To dramatise the effect, the spin masters and their mollycoddling corporate media supporters are drawing up an apocalyptic scenario.

But the reality completely rubbishes this manufactured myth. The three PSU oil majors – IOC, BPCL and HPCL have had a net profit after tax during 2010-11 of Rs 7445.48 crores, Rs 1742.06 crores and Rs 1539.01 crores. And all these figures show an increase over the earlier years. That the trend continues in the same vein is revealed by the audited figures of the fourth quarter of 2011-12 of BPCL which establishes a profit of Rs 3962.83 crores compared to Rs 935.18 crores for the same period last year.

THE REALITY OF

“UNDER-RECOVERY”

While the claim of the government on the sinking fortunes of the oil PSUs is a sham, the next myth which their spin-machine has generated and is now a whirlwind is a claim that the ‘under recoveries’ of these companies need government subsidy – and that is draining life out of the public exchequer.  The lie must be nailed.  ‘Under recovery’ is essentially notional and is nothing but the difference between retail price of a petroleum product and its trade-parity price.  The trade-parity price in its turn actually bases on many unincurred costs because oil companies do not import petrol or diesel and what they sell in domestic market are fuels produced on their own refineries.  In fact, the government appointed Rangarajan Committee in 2006 criticised this concept and the Chaturvedi Committee in 2008 observed: “Under recoveries could not be linked either to the change in the crude oil price or to the published annual accounts of the company.”

But to pursue the pernicious agenda of global finance, the top brass of the Indian economic policy establishment is trying to dress up ‘under recoveries’ as virtual losses and claiming to be subsidising them from the consolidated fund of India.  It is this ‘pearl of wisdom’ which was dished out by Jairam Ramesh recently. But if at all, you can call it subsidy, how much is that?  Replies by the government in parliament and the Ninth report of the Standing Committee on Petroleum and Natural Gas captioned ‘Challenges of Under- Recoveries of Petroleum Products’ clearly show that the so-called subsidy is sharply declining.  While this was Rs 76,688 crores in 2008-09, it had declined to Rs 46,830 crores in 2010-11.  The subsidy is arrived at by loading the cost price with several tax and duties and then reducing by the subsidy amount and eventually selling at a profit.  That is why the oil PSUs have been making profits consistently.  This is not to include the private oil refineries who do not sell subsidised petroleum products in the domestic market and making a huge killing while exporting. 

PETROLEUM SECTOR:

SKEWED TAX POLICY

In any case, data show that the contribution to the public exchequer from the petroleum sector is constantly growing. From Rs 1, 57,219 crores in 2006-07, it had gone up to Rs 1, 83,860 crores in 2009-10.  These include customs duty, cess on crude oil, excise duty, royalty, corporate tax, dividend, tax on dividend and service tax which go to the central exchequer and sales tax, VAT, royalty, dividend, Octroi, duties and entry tax to the State exchequer.  This clearly established that the so-called subsidy is less than one-third of the total revenue from the sector. The huge contribution of the petroleum sector in percentage terms in the overall revenue of the public exchequer is brought out by the following tables:

THE FALLING RUPEE:

PRICE OF PURSUING GLOBALISATION

Therefore, why the government is so desperate?  It is clear that the finance-driven agenda of the government prompted it to offer tax waivers and reduce direct taxes while spreading out the tax burden on the aam admi to achieve the targets for a reduced fiscal deficit. And that will soothe the ‘investor sentiment’-euphemism for global finance. Ironically, it is this overdependence on foreign institutional finance to meet our current account deficit which has led to slide in the rupee value. This devaluation then is being advanced as the reason for this hike as the devalued rupee value is jacking up the imported crude oil costs.

However, there is an inherent over-simplification in this argument. The exports from the oil sector are making humongous windfall profits piggybacking on the wave of rising US$ value. Most of the private refiners like Reliance Industries are part of this ‘windfall scenario’. On the one hand, they do not market kerosene or cooking gas; on the other, they earn huge ‘export duty drawbacks’. Additionally, the government is also earning incremental revenue from advalorem import duty due to falling value of the rupee. The domestic crude oil and gas producers both in the private and the public sector are making extra gains as payment is made to them in US$ terms. Is it not the responsibility of the government to eliminate the gains of windfall profit from exchange rate fluctuation and insulate the people from further rise in prices? But the top brass of the economic establishment would have none of these.

The volatility in price and production of fuel and the value of rupee vis-à-vis US$ also reflect unstable global geo-politics in a phase of acute economic crisis. Can the people be made to suffer unilaterally because of factors for which they are in no way responsible and the exporters and the government get away with a bigger gain?

BLATANT

NEO- LIBERALISM

Therefore, petroleum sector becomes a prime soft target.  The tax foregone figure has reached a whopping Rs 5 lakh crores. And most of it is finding its way to the coffers of the super-rich. The following table from the budget documents is revealing:

The revenue forgone for direct and indirect taxes are given in Table below:

In Rs Crore:

And it is not this tax bonanza alone, but the government allows lakhs of crores to be spirited away to the pockets of ‘crony corporates’ by doling out natural resources-community assets as they are for a song, non-challant of the fact that they amount to engineering scams.

But it is not prepared to spare the common man who reels under the ever burgeoning burden of food inflation.  Otherwise, how can one explain that petrol price in Mumbai is 35 per cent higher than they were in April 2008 when the international crude oil price are at the same level.  In fact, diesel prices are also 16 per cent higher. How can product prices be so much higher when crude oil price remains unaltered? The mystery lies in the unsustainably high levels of tax in the petroleum sector, which the people are forced to pay through their nose- and which manifest in the skyrocketing of the prices of essential commodities which people have to buy for sheer subsistence.

The bias of the government is much too obvious in providing huge tax bonanza to the rich corporates; while people have to be savaged by this ever growing tax burden which inflates the oil prices.  Not content with the petroleum price hike, the mandarins are now running for an increase in administrative prices of diesel and cooking gas.  C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council has not only lauded the petro price hike but has pitched for increasing the administered prices of other petro products. 

This is what neo-liberalism is all about. To meet the targets of fiscal deficit reduction-the single point obsession- and but for which, the ‘investor sentiment’ will be hurt driving away FIIs. Subsidies, howsoever paltry they may be, will have to be weeded out. The fact that these subsidies constitute a small fraction of the revenues mobilised from the petroleum sector is of least concern.

These neo-liberal mandarins are also eloquently silent over the manner in which the international crude oil market is structured in today’s international finance capital driven globalised world. Had they not been so awestruck of global model of Globalisation and little more zealous about securing national interest, they would surely become aware of the existence of a certain June 2006 US Senate Permanent  Subcommittee on Investigations report on “The role of market speculation in rising oil and gas prices”. The report noted “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current has significantly increased prices”. The report pointed out that since the advent of oil futures trading and the two major London and New York oil futures contracts exchanges, control of oil prices has left the OPEC and gone to Wall Street. The very same Goldman Sachs and Morgan Stanley who had rigged the oil prices those days for a windfall profit now stand guilty and responsible for the global financial meltdown. Had these ‘sentinels’ of ‘enlightened national interest’ articulated our concerns instead of displaying their energy on embracing “strategic partnership”, the aam admi who is choking could have been provided little more relief on account of crude oil import pricing which is threatening to go through the roof. But they would have none of these. Instead they argue as to why the retail price of petro-products should not more closely proximate the international crude prices while the sector continues to rake in the revenue resources at the cost of the very same aam admi.

Pablo Neruda wrote famously in one of his “come, see there is blood on the streets”. Likewise, this is really turning out to be a blood bath for the people.  People have started resisting.  There is no other way but to restructure the taxes to provide relief.  The sooner the government realises this, the better.