Frequent petrol price hikes: Govt, OMCs equally to blame

It has ignited anger among not just the Opposition parties but also the partners of the ruling United Progressive Alliance, with one of them even threatening to pull the rug from under the feet of the government.

But, this time around, stubborn oil prices have not spared the marketing companies, responsible for fixing petrol prices after it became market-linked since last year. There is a general ire that these marketing firms are not passing on the profit earned by them to the customers as the losses immediately get translated into a price hike.

On November 3, petrol prices were hiked again by Rs 1.80 per litre, the second time in less than two months and the 13th since June 2010. The action prompted UPA’s key ally, the Trinamool Congress, to threaten that it would withdraw support if the prices were not rolled back. Though, later, the party settled for a ‘financial package’ for the state.

Although the state oil marketing companies - the Indian Oil Corp (IOC) and Bharat Petroleum Corp Ltd (BPCL) - argued that the hikes were inevitable as they were running into huge losses, a section of people believe that the balance sheets of OMCs have swollen in recent times despite their claims of losses.

There is no denying the fact that crude prices are averaging $110 per barrel despite continuing debt woes in Europe, a prediction of recession in the United States and a slowdown in the world’s second largest economy, China. But, it is also true that the government and the OMCs have done very little to curb the prices even in times when the global crude prices ebbed.

The lack of transparency by the OMCs about the methodology adopted by them in calculating their profits or ‘under recoveries’ has also raised doubts among people about their projected losses.

For example in the financial year 2010-11, the three state-owned oil marketing companies registered a cumulative net profit of Rs 10,531.16 crore at the time when crude prices for Indian basket averaged $113 per barrel, but the profit figure, they argued, was arrived at after taking into account the compensation from the government in the form of subsidy.

Experts say, the petroleum companies must adjust the price domestically when the global crude falls. They also must work to cut operational costs to enhance efficiency and improve margins. “Making profit is necessary for oil firms because after all they are here to do business. They cannot run into perennial losses. This will have an adverse affect on their credibility and the international credit that they get to do business,” an energy expert from Ernst and Young said.

Abnormal profits
B B Bhattacharya, eminent economist and former Vice Chancellor of the Jawaharlal Nehru University, told Deccan Herald, “the idea is that the petroleum companies should not make abnormal profits at the cost of the consumer...Oil prices are volatile and one is not expected to earn much profit from them. But enhancing the production capacity and operations can help bring down prices,” he said, adding “a good refinery can bring down the costs manifold”.

The OMCs claim that they are losing out money on retailing petroleum products.
 IOC, the India’s largest fuel retailer, which posted its worst quarterly loss ever in 2011-12 Q2 at Rs 7,485 crore, said its borrowing this fiscal has reached Rs 73,296 crore and that it may not be able to import crude oil by the year end. IOC chairman R S Batola said his company was losing Rs 4 lakh per day as the hike of Rs.1.80 per litre in petrol price was still short of the desired hike of Rs.1.82 a litre.

 So, it is not only the OMCs, but also the government, which has to be blamed for rising petrol prices. The OMCs buy crude at prices prevailing in the international market after which it is processed and the cost of refining is added to it. In the case of petrol, the Centre then imposes taxes to the tune of Rs 14.35 per litre by way of levying a special excise duty of Rs 6, an additional excise of Rs 2 and customs duty of Rs 6.35 per litre of petrol.

In addition to these taxes, the state governments impose their own levies in the form of sales tax and other local taxes, which vary from state to state. There is also a component of VAT and transportation charge added to per litre of petrol. The final pricing of petrol is arrived at after it goes through the imposition of so many levies.

Prices of petrol in India become so high due to this reason. For example, when the price of petrol per litre in India was Rs 65, it was Rs 26 in neighbouring Pakistan, Rs 22 in Bangladesh, Rs 30 in Myanmar and Rs 34 in Nepal.

Experts say that after freeing petrol from its control, the government must take steps towards withdrawing the excise duty and other levies, which alone can give a huge relief to consumers.

 But the question remains, has the government given OMCs full autonomy to fix prices of petrol after freeing it a year ago? It is absurd to think of ‘autonomy’ as government owns all the three major fuel retailers – IOC, BPCL and HPCL and these companies look to it for every big and small decisions.