How have they got themselves into such a spot? India is not, after all, the only country that is reeling under the twin burdens of historically high oil prices and unprecedented volatility. China, Pakistan, Malaysia and Indonesia have all adopted policies to shield their consumers from the brunt of high prices. They have implemented them without distorting the structure of energy demand or undermining the viability of their domestic industry. Why is it that in India we have not been able to secure a similar balance?
One could, of course, place the blame squarely on the nature of our politics. We have been in an election mode ever since oil prices started their upward march. This has limited the manoeuvrability of the Central government to align domestic prices to international trends. Also, the Left has hardly been cooperative. However, this is in my view too generic a response. It suggests that our political system is fundamentally regressive.
I have a more specific explanation. It has to do with inter ministerial turf battles, lack of leadership and the weakening hold of the Central government over state governments. Let me explain this point through the structure of the price buildup for petrol and diesel.
Indian Oil Corporation (IOC) calculates inter alia the landed import duty paid price of petrol and diesel every fortnight. This calculation is based on a formula that is linked to international prices. IOC’s landed price of petrol in Mumbai for the second fortnight of May was, for instance, Rs 38.1 per litre and for diesel Rs 48.8 per litre. The marketing companies had to, in other words, pay this amount to the refiners to buy the products. Next, the Central government imposes an excise and educational cess on the purchase cost. In May, this was Rs 14.4 per litre and Rs 0.4 per litre for petrol and Rs 4.6 per litre and Rs 0.1 per litre for diesel respectively. The total cash required by the marketing companies to purchase petrol and diesel in May was, therefore, Rs 52.9 per litre for petrol and Rs 53.6 per litre for diesel. The companies then sell these products at the ministry of petroleum mandated price of Rs 49.7 per litre for petrol and Rs 35.6 per litre for diesel (Mumbai prices). As such, they lose Rs 3.2 and Rs 18 for every litre of petrol and diesel sold respectively.
That, however, is not their total loss. They have to also pay sales tax to the state governments. In Mumbai, this tax is Rs 10.6 per litre and Rs 7.1 per litre for petrol and diesel respectively. Thus, the total cash loss suffered on account of the sale of 1 litre in Mumbai is Rs 13.7 and Rs 25.1 for petrol and diesel respectively. This is, in other words, the amount by which prices would have to be increased at the retail outlet for the companies to simply break even on a cash basis. Such a hike is, of course, out of the question.
The logical solution should be a package that combines a price hike with a reduction in the central and state tax rates. After all, central and state taxes account for 32 per cent (diesel) and 50 per cent (petrol) of the price build up. But logic gets tossed aside in the face of turf and power battles. The finance ministry will not forego its windfall gain; the top leadership will not force a compromise between the petroleum ministry and the finance ministry. And the Central government does not have the clout to compel the state governments to countenance a reduction in their revenues.
The consequence of this stalemate is now coming home to roost. The oil companies are, of course, close to bankruptcy. But more egregiously, we are now seeing a distortion in energy consumption patterns. The domestic price of diesel is today less than the price of furnace oil (internationally among the cheapest of products that come out of a refinery). This is encouraging a switch from furnace oil to diesel and in consequence a sharp hike in the consumption of diesel. Its demand growth is now exceeding 20 per cent per annum. The ‘dieselisation’ of the economy is also making a mockery of efforts to secure energy independence.
Everyone will have to bear the implications of adhocism in policy. This must not, however, take away from the urgency of mitigating the longer-term consequences. Even amid the twists and turns of current policy my hope is that the government will look to placing petroleum policy within the bounds of a more sensible economic and pricing framework. What should be the drivers of such a framework?
First, we should accept that high oil prices are here to stay. This does not mean we will not see sharp declines from present levels. What it does mean is that we will not see prices stabilising at levels significantly below a triple digit number. Second, we must create a mechanism that leads to a ‘graduated’ reduction in subsidies, an orderly alignment of domestic prices to international levels and a more efficient disbursement of financial support to the poor. Third, we must reverse ‘dieselisation’. And finally, we must recognise that the sine qua non of energy security is a robust and competitive domestic petroleum and energy sector.
The writer is chairman of the Shell Group of companies in India. Views are personal express@expressindia.com
Vikram S Mehta
