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The slippery politics of gold

The government is taking undue credit for decreasing oil prices. It would do well to establish a fund where excess money earned from low crude oil prices can be deposited and used for stabilizing prices later [/h2]

By Sabiha Farhat


IN the run-up to the Delhi elections, BJP president Amit Shah and Prime Minister Narendra Modi were heard wooing voters by recounting how the government had brought down petrol and diesel prices. “Hasn’t the Modi government brought down prices of petrol and diesel?” asked Amit Shah at a rally. The response was a loud “Yes”, accompanied by thunderous applause. But as Abraham Lincoln said: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” The BJP government’s happiness was indeed short-lived, as the Delhi election results showed.

Petrol prices were deregulated by the Indian government in 2010 and diesel prices were undergoing deregulation in a staggered manner. In October 2014, the current government “completely” linked diesel prices to the international market. This was just the right moment to deregulate diesel, as international crude oil prices fell from $115 per barrel (June 2014) to $44 per barrel (January 2015). It is just the luck of the Modi government that falling oil prices matched with its arrival. But are the prices really as free as we have been told?

WINNING PROPOSITION

The government companies that import crude oil are O­NGC (Oil and Natural Gas Corporation) and OIL (Oil India Limited). They sell the crude oil at a discounted price to oil marketing companies (OMC). The “refiners cum marketers” are IOC (Indian Oil Corporation), HPCL (Hindustan Petroleum Corporation Ltd) and BPCL (Bharat Petro-leum Corporation Ltd). OMCs have a refinery arm and a marketing arm. The refinery unit converts crude oil into diesel, petrol and other products. It sells the same to its own marketing unit at an international price. The marketing unit sells it to the end consumer at a retail price, pre-determined by the government. As a subsidy payout, the government pays back this loss to OMCs from the money it generates by taxing us on petrol, diesel and other products.

And that’s the reason for the heavy excise duty on petrol and diesel. In the recent past, consumers have paid as high as 52 percent excise duty, with every price hike generating more revenue for the center. Add to this the direct tax paid to the government by oil companies and it is a winner all through.

But what the government promises under deregulation is that it will no longer decide the price of petrol and diesel and that these will now depend on international market rates and OMCs.

So what does that translate to? A barrel contains 159 liters of oil. Considering that the price of oil hovers around $50 a barrel and the dollar-rupee exchange rate being around Rs. 62, a barrel of oil would cost us Rs.3,100 or Rs.19.49 per liter. Add to this an average processing cost of Rs. 4 per liter, transportation, freight, packaging and refinery margin of Rs. 3.50 per liter, import duty of Rs. 4 per liter, commission to the petrol pump dealer at Rs. 2 per liter and your gross price of petrol will add up to Rs. 33 per liter. Add to that taxes, of which VAT goes to state governments and excise duty to the central government. At the current rate of Rs. 56 per liter for petrol, the government is earning Rs. 23 on every liter. Besides this, the government collects revenue from OMCs in the form of direct taxes.

In a written reply in the Rajya Sabha, Jaitely said that the initial excise duty hikes within a span of three weeks would fetch the exchequer Rs. 10,500 crore in the remainder of the fiscal ending March 31,2015. The government later went on to raise the excise duty on two more occasions, bringing up the estimates to nearly Rs. 18,000-20,000 crore this fiscal year. This revenue through taxes is a variable. Between November and January, there have been four hikes in excise duty, steadily raising government collections. So are the prices really deregulated?

“Presently, the prices are being moderated by the government,” says Narendra Taneja, an energy expert. “The Indian government needs to innovate and establish a Petroleum Price Stabilization Fund where the excess money that is being earned from low crude oil prices presently should be deposited. This money can be used for stabilizing petrol and diesel prices later when the international prices go up,” he says. He feels the government will be forced to intervene on behalf of consumers as oil is a “strategic commodity”.

TESTING THE WATERS

“As prices have been deregulated, technically, the oil companies are free to set their own price,” says Gaurav Moda, Partner, Oil & Gas, KPMG. He points out the context in which this scenario has to be looked at. “The government tested waters with petrol price deregulation, which affects the middle class most. Once they realized there was not much public outcry when the prices peaked, they went ahead with petrol deregulation. But diesel cannot be treated likewise, as a hike here will directly hit many other commodities such as vegetables and general transportation and their prices will shoot up. So the government is playing the role of a ‘facilitator’. It is supporting the market. Deregu-lation cannot be instant,” he says.

While it may be the right moment to dere-gulate diesel prices when international prices are falling, what will happen when these prices begin to soar again? “This is a transition phase, the government will have to play facilitator for at least 2-3 years before completely opening up the market,” says Gaurav Moda. “Even oil companies that want to enter the Indian market will wait and watch.”

The crucial question is whether or not the government will moderate or support the market when the prices climb? This, like everything else, will be decided by the politics that will be played 2-3 years hence, when the government will be preparing for its second term. Anything that will hurt the voter will hurt the government’s interest. So even tho-ugh today the government is taking credit for its bold steps, will it deregulate diesel by keeping a fixed tax structure (excise duty)? That remains to be seen.
The government may be able to walk the talk on oil if it pursues its development agenda. Finance Minister Arun Jaitley, while deregulating the oil prices, had claimed that the revenue earned will go into infrastructure development. If that happens, the consumer may be bought into a price hike led by international crude oil prices which are expected to go up to a minimum of $70 a barrel by the year-end.

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