Opinion

Spike in domestic oil prices not justified

PSM Rao | Updated on February 28, 2021

Key factors such as international crude prices, exchange rates, subsidies and profits of oil marketing firms aren’t unfavourable

People demand satisfactory answers to the following questions to know why petrol and diesel prices in India are on the boil again:

Is it because the international crude oil prices are skyrocketing?

Has the dollar price increased steeply, whereby more rupees are to be spent to get the same amount of crude?

Are the oil marketing companies facing huge losses?

Is the government untenably burdened with a high petroleum subsidy whereby it wants to ease it through oil prices hike?

Is the market that determines the price, in which government has no role to play and therefore it has become a silent spectator when the prices unreasonably move upwards and forget to go southwards in tandem when the international prices fall?

 

For sure, the government doesn’t have a ‘yes’ answer to any of these questions because there is enough evidence to refute all of them.

First, international crude prices have not reached a never-before level although petrol prices are now close to ₹100 a litre in some States, with diesel prices moving in tandem. High import prices are no reason for the present hike. The Indian basket of crude cost was $54.79/barrel (about 159 litres) in January 2021, and petrol in Delhi, for instance, was sold at ₹86.34/litre. In September 2013, it was higher at $111.59/barrel and petrol price in the same city was ₹76.06.

Then the second presumption, the exchange rate must be higher than before making the crude costlier in rupee terms. No. Crude import price per litre was ₹46.94 when the rupee-dollar exchange rate was ₹66.89 in 2013 whereas in January 2021, the exchange rate was ₹72.90 and the per litre crude cost at that rate was ₹25.12.

Third, losses of oil marketing companies. No. No losses to them; the Petroleum and Natural Gas (PNG) statistics confirm that beyond any doubt. All the CPSEs under the PNG Ministry earned a combined profit after tax of ₹69,714 crore in 2018-19; the profits have been constantly increasing for the seven-year period, for which the data is given, from ₹39,419 crore in 2012-13.

Whopping revenues

Fourth, subsidy burden on the government. No. Revenues to the Central and State governments have risen continually as the 2012-13 to 2018-19 data show. As per the 2018-19 provisional figures, the State and Central governments received: (i) royalty from crude oil of ₹16,964 crore; (ii) royalty from gas of ₹2,364 crore; (iii) Oil Development Cess, ₹18,984 crore; (iv) Excise & Custom duties, ₹1,63,162 crore; (v) sales tax, ₹2,01,265 crore; and (vi) dividend, ₹30,323 crore. All this adds up to ₹4,33,062 crore — a single-year revenue.

The subsequent revised figures have shown a still higher amount of ₹5,75,632 lakh that year, of which, the Centre’s share was ₹3,48,041 crore, equal to 22 per cent of its revenue receipts. The remaining ₹2,27,591 crore went to States which was equal to 8 per cent of their revenue receipts. That year, the Centre’s actual subsidy to the petroleum sector, as per the Budget document, was ₹24,837 crore which equals 7.13 per cent of what it receives from the sector and 4.3 per cent of the total revenue of both the Centre and States together. This means that the government doesn’t give, but takes a lot from the industry.

The total government subsidy for fertiliser, food and petroleum aggregated to ₹1,96,769 crore. This constitutes 56.53 per cent of the central petroleum revenue and 34.18 per cent of the total petroleum sector’s revenue. This clearly shows that this sector meets the entire Centre’s subsidy burden; so, it would be wrong to say the subsidy to the sector is a burden on the government.

Fifth, the government is helpless; all this is the making of market forces. No. It could halt the prices, although international crude prices went up during the election season. Strictly speaking, the government should not interfere with the prices after discarding the administered price mechanism; but it did intervene and suspend the hike when it wanted.

Also, the government can reduce the price through tax cuts if it wants.

True, India depends heavily — up to 85 per cent — on imports for its petroleum needs; it produced only 32.2 mmt of crude in 2019-20 against 214.1 mmt consumption that year. Yet, that is no justification for the current price hike.

Imports are a burden, but India exports petroleum products, too. Putting its excess refining capacities to good use, in 2019-20, for instance, India refined 48.8 mmt crude than was domestically required. It had imported 262.9 mmt crude against 214.1 mmt consumption. It could thus export petroleum products worth $38.8 billion which accounts for 11.4 per cent of its gross export value. The import bill of POL (Petroleum, Oil and Lubricants) that year was $119.1 billion, equal to 25 per cent of India’s gross imports.

More transparency needed

So, while thinking of the costs, the export earnings and domestic production of crude should also be factored in; not just the crude import cost. The government should be transparent enough to share all the details with the people and not scare them with misleading assertions and information.

Also, the government should make public the profits it makes in different modes — tax and non-tax — by keeping the prices within the specified bounds.

Instead of indulging in mutual accusations, the political parties and the government should understand that the interests of the petroleum industry and the public are closely intertwined.

This is not only because of the high import dependence of the sector but because of its potential to increase overall inflation in the country with the resultant erosion of real incomes of people. No profiteering at the cost of public interest, please.

The writer is a development economist and commentator on economic and social affairs

Published on February 28, 2021

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