Oil’s well until India goes to polls

Amit, who works as a driver in South Delhi, earns ₹15,000 a month, of which ₹2,500-3,000 goes towards petrol for his bike; Ravi, an office assistant, incurs the same expense every month. A businessman like Sanjay Malhotra in Noida (Uttar Pradesh) spends over ₹10,000 a month on petrol. Aside from minor variations here and there, this is how the average Indian’s petrol budget looks like around the country.

Some days it pinches the pocket more than on others, in line with the rise and fall of crude oil prices in the global market. These daily shifts in price were noticeably missing in May last year, when Karnataka went to polls to elect its new government. Once the votes were in, however, petroleum prices began rising continuously until they were in sync with the global rates.

Though both the government and the public sector oil companies deny this, it is an open secret that during elections there is an informal diktat to keep the retail price flat and not pass any spike in global prices to the consumer.

After all, if diesel turns costly, transportation costs will go up and, in turn, the prices of fruit, vegetables and other goods will spiral. Farmers who use diesel gensets for irrigation will be badly affected too. And who would want an unhappy electorate?

With the general elections on now, this ‘informal’ price control is apparent, even as global crude oil prices are on the rise.

The average retail price of petrol and diesel from March 10, when the elections were declared, to April 30 was ₹72.84 and ₹66.53 per litre, respectively, in Delhi. The average price at which Indian refiners bought crude oil during this period was $67.40 a barrel. The retail price is based on the average global price and the dollar-rupee exchange rate over the past fortnight. On April 30, there was a token hike of 5 paise a litre for petrol and diesel, although the requirement was ₹1 even after taking into account the softening global prices.

After decades of artificially controlled prices led to deep losses, petrol prices were deregulated in June 2010. From January 2013, diesel price was increased by 50 paise per litre every month, until it was fully deregulated in October 2014. Since June 16, 2017, the public sector oil refining-cum-marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — have been allowed to revise petrol and diesel prices on a daily basis. Yet, governments across party lines anxiously insist that they are doing all they can to protect the common man from volatile crude oil prices.

You may then ask, what is the politics being played out here? It is all about manipulating the price in a way that the government doesn’t lose sleep, but the common man does — namely, robbing Peter to pay Paul.

The many populist schemes that governments float are dependent on the revenue they collect. The tax on petroleum products is a major source of revenue and makes up nearly 50 per cent of the retail price. The only way to control prices without distorting market dynamics is by reducing the tax component. But governments — Central or state — are unlikely to deny themselves this revenue.

Since the local levies vary from state to state, there is a demand to bring petrol and diesel under the Goods and Services Tax regime to ensure uniform pricing across the country.

The buzz is that the retail prices of petroleum products could rise steeply — by at least ₹1-2 a litre — after the last round of voting on May 19. Even during the pre-liberalisation period, after being artificially repressed during an election, prices were seen to rise by as much as ₹5 per litre after voting ended.

Remarking that pump prices have remained flat despite recent hikes in crude oil prices, Sri Paravaikkarasu, director — Asia Oil, at global oil and gas consultancy FGE, says, “This is unsurprising, as the government has exhibited similar strategies in the past during an election... the incumbent Central government is attempting to keep consumers happy by indirectly regulating retail prices in a bid to shore up votes.”

But she is not worried about any immediate spike in prices post the elections. “This could trigger a public backlash. Instead, the government would go for a gradual increase in retail prices.” She also does not foresee any drop in demand for petroleum products, as there has been a steady growth in energy consumption owing to the current growth in the Indian economy. “We are not expecting any sharp fall in oil demand even if retail prices go up somewhat.”

So, is India ready for a market-linked pricing regime?

While conceding that price control during elections does distort the market, Ajay Bansal, president of All India Petroleum Dealers Association, cautions that “daily change of price has also created enough problems”. The government must decide whether to keep the pricing system dynamic or controlled — it cannot intervene whenever it fancies, he adds.

On the other hand, Kirit S Parikh, chairman of policy research body Integrated Research and Action for Development, who has headed key government committees on pricing, is confident that “we are always ready for a liberated regime. When a country is 80 per cent import-dependent for its crude oil requirement and the market price is not passed on but artificially controlled, it has an undesirable impact on fiscal deficit and inflation.”

Private players — whether it’s Reliance Industries or Shell or Nayara (earlier Essar Oil) — could not compete with the public sector entities when prices were artificially controlled, forcing some of them to eventually shut down their petrol pumps.

When it comes to the cooking fuel LPG (liquefied petroleum gas), the government offers subsidy only for 12 cylinders a year for each household. Its price continues to be moderated by the government to insulate the common man from global spikes and inflation.

LPG prices are typically revised on a monthly basis. However, due to elections, the oil companies have not passed on to domestic consumers the full extent of the spike in international rates, while commercial users have not been spared.

On April 30, though domestic LPG prices were hiked by ₹6 for every 14.2 kg cylinder, the actual requirement was at least ₹18. Dealers fear that the next price revision, post polls, could be a shocker for the average household.

At the end of the day, it is the consumer alone who pays the price.

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