Friday, July 2, 2010


The government of India has deregulated the prices of petroleum products. This means the prices of petroleum, diesel, etc., will continue to increase with the increase in the price of crude in the international market. The government has once again increased the prices of petrol, diesel. This time even the kerosene and cooking gas were also not spared. The fresh increase comes close on the heels of tax hike in the Union Budget in February. The deregulation would affect further increase in the prices.

For instance, the Kirit Parikh committee which the government is eager to implement has recommended the increase of Rs. 100 in the price of cooking gas. The all round increase in the prices of petroleum products comes at time when the people are reeling under sky racketing prices of essential commodities. The food inflation has touched historical levels. The petro price hike will have a cascading effect on the prices of almost all commodities as the transport prices shall go up. It is ridiculous that Rangarajan claims that petro price hike would only result in the only one percent rise in inflation. But, the inflation in fact does not have any relationship with the actual prices in the market.

The government refuses to implement the report of the parliamentary Standing committee on pricing of petroleum products submitted in 2006. But, the government is pursuing a fast track approach to implement the reports of Kirit Parikh and Rangarajan committees. It is a sad reflection democracy that parliamentary standing committee has no sanctity while the so called expert committee reports are preferred.

The government claims that the petro price hike is inevitable due to rise in the prices of crude in the international market. This is true given the fact that exports constitute nearly 80 percent of India’s hydro carbon consumption. This heavy dependency on the international market makes it an imperative to link even the prices to international market. But, the government has to answer a fundamental question here. The prices of crude in the international market are dictated by speculative forces indulging in forward trading of petroleum crude. The prices of crude are not related to demand and supply in the international market. In case if the speculative forces take the price of crude to 200 dollars per barrel, will the government pass on this burden to common man in the name of deregulation and reforms? In such an eventuality, the price of petrol would reach Rs.100 liter and perhaps the price of cooking gas will touch Rs.600 per cylinder. What will be the political fall out? Can the government survive the popular upsurge due to it? The deregulation of a scarce commodity makes no economic sense or even common sense. The democratic political system can not absorb further rise in petro prices.

Therefore the time has come to look at the alternatives rather than resorting to frequent price hike. The first thing the government should do is not to look at the petroleum sector as a source of revenue.

In fact the parliamentary standing committee has recommended precisely this. This committee consisted of MPs belonging to all the major political parties. It was headed by Congress leader N.Janardhan Reddy and even Sonia Gandhi’s political secretary Ahmed Patel is also a member.

Look at the tax burden on the consumers of petroleum products. During the year 2009-10 as per provisional figure available for the period April to December, 2009, the contribution to central government exchequer by petroleum sector is Rs 56,365 crore. The subsidy provided by the government, including the oil bonds issued to OMCs during the same period, is Rs 14,058 crore i.e., 25 per cent of petroleum sector’s contribution in taxes and duties. Therefore the “Aam Admi” pays 100 rupees as taxes/duties and gets 25 rupees as so called subsidy! The Government is reducing this ratio below 20 per cent in 2010-11 by extracting additional revenue of Rs 30,000 crore through hike in import duty on crude and excise duty on petrol and diesel.

The contribution of petroleum sector to central revenues rose from Rs 46,603 crore in 2001 to Rs 93,513 crore in 2008-09.

The government further charges cess on crude oil produced by ONGC and OIL (only public sector oil producers, not the private ones) which was Rs 900/tonne in 2000-01. The NDA government in 2002 doubled it to Rs 1800/tonne and the “Aam Aadmi Sarkar” in 2006 increased it to Rs 2500/tonne. Rangarajan committee recommends it to be raised to Rs.4800/tone. Only on this account, the government collected Rs 81,106 crore since 1974. Only Rs 902.04 crore was given for the development of oil industry for which this cess was imposed. The Parliamentary Standing Committee on Petroleum and Natural Gas in its report laid in parliament in 2006 recommended that a Price Stabilisation Fund be created by using the money collected from cess to bring in stabilisation in the prices of petroleum products. They had also desired that a part of the cess amount should be utilised to provide subsidy on kerosene and LPG. The Ministry of Petroleum and Natural Gas has agreed that there is a case for establishing a ‘Price Stabilisation Fund’ with funding from the cess on indigenous crude as the oil prices have been extremely volatile in the recent past and the oil companies have not been able to pass on the full burden to the consumers resulting into under recoveries. The Planning Commission has also supported the proposal ‘in principle’ for utilisation of cess for the purpose of oil industry/operating the Price Stabilisation Fund. However, the Committee is unhappy to know that the Ministry of Finance has not agreed to the proposal for setting up the Price Stabilisation Fund. They strongly disapprove of the negative approach of the Ministry of Finance to such a vital issue, explains Deepankar Murkherjee, member of this committee.

The committee had recommended that the customs duty waiver given to the exporting companies on part of their crude imports should be discontinued and the revenue gained by the government in the process should be passed on to the consumer by way of reduction in excise duties on petroleum products as huge international prices alone can take care of the profits of the exporters. But the government refuses to withdraw the benefits given to private corporate.

The government chooses to burden the people by refusing to consider available alternatives to petro price hike.

This article is Originally written for the Deccan Post



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