Petrol price hike: Is govt setting the stage for entry of private players?

Petrol price hike: Is govt setting the stage for entry of private players?

Some figures on the international crude oil prices (NY Mercantile Exchange) on certain dates and retail petrol prices in Mumbai at about the same time can be seen in the box.
It is seen that the crude oil prices touching or crossing the $100 mark is an old phenomenon. It is not new as is made out to be. We managed well with petrol prices of Rs 48.76 and Rs 50.50 almost two-and-a-half years ago. Then, why is the present urgency to hike the price to Rs 68.33 — about 40 per cent rise over the June 2009 price — with the possibility of a further rise? In fact the crude prices have averaged at about $86. One does not see the drastic rise in the crude prices as is made out to be. Hence, the panic rise in petrol prices seems unjustified. One wonders whether there is a different game-plan by the government behind this entire hike, like making the pitch ready for the private companies to retail petrol at comfortable profits.

Some statements by the government’s functionaries are intriguing and add to the above suspicion. It is reported that the chief economic adviser in the ministry of finance has said that “if the global crude touches $150 to $160 a barrel, the government would be forced to deregulate diesel prices.” There is no need for such wild speculations.

Almost half the price of petrol is composed of excise and other duties. The government is already taxing the common man heavily in this manner and getting huge revenues. Where is the need to squeeze him further? Is petrol government’s ‘cash-cow’ to be milked time and again? For all these taxes paid by the ‘aam admi’, what does he get in return? Actually, there seems to be very little connection between the taxes on petrol and the basic needs — roads with no potholes to begin with — of the commuter.
As per the government, the very basis for the upward revision in prices is that the petroleum companies — like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum — are making huge losses. Are they really? (See box)

The profits may not be huge, but they are there as per the balance sheet made public.
So, what are the ‘huge losses’ they are talking about? The governmental sources will immediately point out that it is not the ‘loss’ but ‘under-realisation’ on the sale of petrol, diesel, kerosene and domestic LPG as the retail selling prices are not in line with the international prices. So, it is the ‘under-recovery’ or the notional loss of revenue had the prices been equal to the import prices of these products.

Thus, the talk of a loss of Rs 16 per litre on diesel and Rs 27 on kerosene and Rs 316 on domestic LPG is just about ‘notional’ figures — in comparison to ‘import parity prices’ for these products. The petroleum PSUs and the government seem to be ruing over the misfortune of missing out on larger gains had they sold the products globally. It is true that there are very many countries where the price of petrol is higher than in our country — eg: Canada, New Zealand, Sweden and Norway. But, there are several others where the price is lower — eg: USA, China, Pakistan, Sri Lanka and Kenya. Somehow, the special nature of our economy and its people and the rationale of having PSUs deal with petroleum products seem to have been forgotten.

The government does another queer thing. It compensates for the ‘losses’ by issuing Oil Bonds to the oil PSUs. These bonds are not sold but issued. That is, the government does not get any money on this transaction. To make matters worse, this largesse does not get reflected in the fiscal deficit. Moreover, very often the PSUs use this long-term debt for financing short-term operations giving rise to several anomalies. All in all, bad financial practices. The government is comfortable in giving such subsidies because it has already made huge money on the sales tax and excise on petrol which the common man pays while buying petrol at the pumps. If it has to deregulate the price of petrol, should it not cut down on the indirect taxes it collects from us the ‘aam admis’?

Petroleum sector is marred by lack of clarity, half-truths and potentially ruinous financial practices. Nice place to bamboozle the consumer, milk him further by raising the prices of essential items on which his livelihood depends, and thus probably prepare a good ground for the private players to take the milking one step higher.

(The writer is a former professor at IIM, Bangalore)

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