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Monday, Aug 08, 2022
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Beyond Business

Down The Oil Abyss, Slowly

Would the poor and middle-class not vote for the ruling party if LPG and kerosene prices were hiked as well? Shouldn't the government take the blame for putting today's sun under tomorrow's clouds, by its mishandling of the petro sector?

Down The Oil Abyss, Slowly
| AP
Down The Oil Abyss, Slowly
outlookindia.com
-0001-11-30T00:00:00+05:53

Similarly, the poor and middle-class won’t vote for the ruling party if prices of kerosene or LPG go up, right? Well, you could be surprised.

Merely a decade ago, in 1996, when the UF government with the same finance minister as now had sharply raised petro prices, protestors, vehement and vocal, took to the streets. Today, only the Left threatens a strike, emptily, merely to assuage its own votaries, because it knows it’s already a party to the decision. Even the stockmarkets are not overtly worried.

And no, consumers haven’t suddenly become richer beyond their dreams, they’ve just wisened up to economic realities. And these are that global oil prices have gone up beyond our worst nightmares. It would have been great if the government had gone on subsiding the prices, like parents keep on protecting errant children, but if it doesn’t, we hardly have any reason to complain, living in a country that imports three-quarters of its oil needs. Indeed, consumers know that a little less outgo on petrogoods means a little more outgo in some other taxes--the pound of flesh always evens out.

Even after the latest hike, we don’t pay a great deal, thanks to the bad-news-in-instalments policy for petro sector. We pay over Rs 3 more for petrol and over Rs 2 for diesel, instead of over Rs 11 and over Rs 8 that the oil companies wanted to protect their margins in these two products. LPG and kerosene, which should ideally have gone up by Rs 98 and Rs 13 respectively, being responsible for half the losses in the sector, remain as cheap (or dear) as before.

Thus, instead of the annual projected losses of oil companies of Rs 40,000 crore, the government is now able to make up about Rs 5000 crore. Will that help? Perhaps the Indian Oil Corporation, the Fortune 500 company that showed a loss in the last quarter, will manage, but the other three marketing companies will have a tough time. IBP, a marketing subsidiary of IOC, may even go under.

Clearly, the government couldn’t have hiked all the prices all the way and risked revolution. No analyst in her right mind would even suggest it. But shouldn’t the government take the blame for putting today’s sun under tomorrow’s clouds? Shouldn’t it be squarely blamed for continuing with the oil pool deficit after a fashion even after it was abolished? Shouldn’t it take the responsibility for messing up with the prices of these four products and overtly politicise and therefore throttle the oil sector?

It should and here’s why. It’s weird to argue for a hike in the prices of LPG and kerosene but the arguments in favour are too many and strong. One, a price hike of only Rs 20 a cylinder would have cut down the losses by another Rs 5000 crore. Two, Rs 20 divided by 30 days (assuming that a cylinder lasts for at least a month) is too insignificant a hike in per day fuel cost and eminently bearable. Three, a price hike in kerosene--the last one was three and a half years ago-would have made sure that only poor people used it and it was not diverted for illegal usage like adulterating diesel. Industry sources strongly feel that a slowdown in diesel consumption could be strongly linked to adulteration. The government just made an illegal activity and polluting the atmosphere even more lucrative.

What is also difficult to understand is why can’t oil prices and the entire system of fixing them come out of its mysterious, protective sheath. Here again, the benefits are many. One, at least then the consumer knows what he’s paying and the government can easily link it to the global prices (import parity, as it is called). Two, the many duties--central and state--on these prices would become transparent, ending the frequent tussles between the petroleum and finance ministries. Three, it would have been easier to decide a rationalisation of duties--switching from ad valorem to specific, or equalising customs tariffs. Four, the refining margins of companies would also come under the spotlight. Five, and the most important, the government would find it easier to subsidise specific groups of population/voters through cash transfers or even as a component of job schemes.

Government feet-dragging in petro sector is not only tying Indians and the economy in a vicious high-cost, energy-inefficient circle and inhibiting exports but also constraining the auto sector, otherwise a spirited example of India’s globalisation effort. Worse, by adding to the budget deficit and forcing the government to borrow more and raise taxes, it’s also taking a few percentage points off growth. We’re blindly putting off the mortgage payments, without caring that someday the entire burden may collapse on us.

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