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Should prices of petroleum products be raised?
June, 04th 2008

There is no doubt the oil companies are bleeding, but the issue is whether the government should also reduce the extra taxes it gets from high oil prices

Dharmakirti Joshi
Director and Principal
Economist, CRISIL Ltd

The sharp increase in global crude prices has brought the issue of energy pricing and its taxation to the fore. A number of emerging economies have suppressed petroleum prices in order to control inflation. According to an IMF survey, only half of 42 emerging markets aligned domestic petroleum prices to global prices in 2007. With oil prices touching $135 per barrel, the cost of keeping a lid on prices of petroleum products has become fiscally unbearable.
India too, by suppressing the prices of petrol, diesel, kerosene and LPG has pushed the losses of oil companies to unprecedented levels. This is imposing a huge fiscal cost on the government while crippling the finances and expansion and modernisation plans of oil companies. And above all, the consumer has got no signal to rationalise oil consumption. The usage of oil in terms of barrels per unit of GDP has remained stagnant in the last three years, implying no attempt at conservation. Industry does bear the brunt of rising oil prices as it faces a decontrolled price regime, but the individual consumer remains largely insulated from the global crude price scenario.
As a sharp correction in global crude prices does not seem plausible in the near future, a number of countries have raised domestic retail prices of petroleum products. Indonesia has raised prices of petroleum products by 30 per cent while providing subsidy to the poor. Sri Lanka and Taiwan too have initiated a similar price correction and Bangladesh and Malaysia are contemplating the same.
With inflation crossing 8 per cent, the Indian government too has been vacillating over the issue of pass through of global crude prices for some time. There has been talk of imposition of an oil cess and also of rationing. None of these are enduring solutions. Rationing, for instance, is known to promote hoarding and black marketing. It is also argued that the high level of taxation keeps the pressure on oil prices in India. In fact, India compares favourably with many other countries in terms of level of taxation. Oil being a scarce resource needs to be taxed. The problem in India is not with the level of taxation but with the structure of taxation to support the subsidy and cross subsidy regime.
We missed the opportunity of raising domestic oil prices when the inflation was low last year. Today, there is no option to raising oil prices as price signals are the only tool that will work. Global crude prices are not within our control but efficient use of oil definitely is. Raising the prices of petroleum products will trigger efforts at its conservation and efficient usage as has happened in OECD countries. Needless to say, this will also reduce the fiscal stress of the government and work towards restoring the health of oil companies. The consumer will bear the brunt, but enduring some pain' in the short run and pushing reforms forward for a better and efficient pricing regime is clearly a superior policy alternative and perhaps most sustainable one.

Dipankar Mukherjee

The base price of petrol in Delhi is Rs 21.93 a litre and that for diesel Rs 22.45 while the retail price is Rs 45.52 and Rs 31.76 respectively. As much as 49 per cent of the retail price of petrol and 26 per cent in the case of diesel, it is important to keep in mind, is made up of central excise duty and VAT. So isn't it ridiculous to claim that oil marketing companies are giving consumers a discount (under-recovery) of Rs 16.3 a litre of petrol when the consumer pays Rs 22.37 per litre as tax and duty to the exchequer instead?
This apart, with the increase in crude oil prices during last few years, there has been windfall rise in revenue earned by the central and state governments. In 2001-02, the government (centre and state) earned Rs 73,800 crore from the oil sector, this rose to Rs 96,751 crore in 2002-03, Rs 104,375 crore in 2003-04, and finally to Rs 164,000 crore in 2007-08.
In addition, an amount of more than Rs 7,500 crore is collected every year as cess by the government at the rate of Rs 2,500 per tonne from public sector oil producing companies ONGC and Oil India Ltd as per OID Act, 1974.
Even a 10 per cent overall reduction in taxes/duties can give a relief of more than Rs 16,000 crore to public sector oil marketing companies which is more than the Rs. 12,000 crore proposed to be raised through price hike of Rs 3 per litre in petrol and Rs 2 per litre in diesel. Is it too much for the people reeling under 8.1 per cent inflation and skyrocketing prices of essential commodities to expect this relief from the Government?
Private upstream oil producing companies (unlike Oil and Natural Gas Corporation) and private standalone refineries (unlike the public sector oil marketing companies) are making windfall profits in production and refining business as they are charging international prices without any linkage with actual production and refining cost. The refiners are getting import duty and sales tax exemptions.
The windfall profit of private oil producers and refineries can be easily gauged from their turnover and profit during the last three years.
In 1980, a federal legislation was passed in the US that levied a windfall tax on profit of such oil companies because of the profit they earned as a result of the sharp increase of crude oil price brought about by the Arab oil embargo. What stops a capital-starved nation like India from doing the same?
The talk of Rs 220,000 crore loss of public sector oil marketing companies is a clear case of "scare mongering" indulged by the government and a section of media. These are notional losses based on international prices and not the actual loss computed in the balance sheet. Let the actual losses be assessed and various options, other than a price rise, be implemented as specifically reiterated time and again by the Left parties.

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