Fuel price hike: Bad politics and bad economics

“I’m sandwiched between economists and populists” said Jaipal Reddy, our union minister for oil and natural gas, about the recent price hike of diesel, kerosene and LPG. Wrong statement, if you ask me. Actually, he’s sandwiched between bad economists and bad populists(read politicians). And that’s because the recent price hikes in fuel are a result of both, bad economics and bad politics. If you ask me to define the primary job of our govt it can be done in one single statement- To bring down the cost of living and to raise the standard of living of it’s citizens. But this decision by our govt seems to be doing the exact opposite- To raise the cost of living and lower the standard of living of it’s citizens.

Before we proceed any further we need to take a look at some important facts. Firstly, all this talk of oil companies running in losses is nonsense. They’re making losses, if any, because of high tax structure on fuel products which can even go upto 50% in certain cases. And our govt rakes in more than one lakh crores every year by way of taxes on fuel products. Surprised? I’m sure you are. Secondly, only the price of petrol has been deregulated to be linked with international prices and not those of kerosene, diesel and LPG. Thirdly, our inflation rate for the month of May was just over 9% which after this huge hike will definitely touch double figures.

To begin with let me tell you guys that had it not been for the taxes the price of petrol, going by the international crude prices as they’re today, should be around Rs35, not a penny more. Also, after the price hike of petrol by oil companies in May, the international prices of crude oil have indeed come down by more than $20 from $112 in May 11 to $91 now, and the trend for the future is even more negative. But have these companies announced a rollback in petrol prices? No, they’ve not. Instead, they’ve forced the union govt to raise the prices of other oil products. It doesn’t really matter that the extra profit that oil companies were making on petrol should’ve offset any losses that they incur on other oil products. Or are these companies making up their losses which they might have incurred earlier? And if they really are doing this then what is the cutoff time, implying till how far back will they go in history to make up for their losses? If these companies are indeed being allowed to make up their losses of days/months/years gone by then what’s the point of deregulating prices of petrol? Will the economists please explain this to us normal citizens?

That was the basic economics part of it and now let’s come to the populists err politicians. After this hike the worthy finance minister Mr Pranab Mukherjee promptly asked the state govts to lower taxes on these products which a couple of Congress govts did, all of 75 paise worth on every liter of kerosene and/or diesel. Whom are these people fooling? Why didn’t he lower the tax rate on these products instead beforehand? And the answer to that question is to show that Congress cares for people. Or to soften the blow, so to speak, but a blow nonetheless. It is a different matter that even beggars don’t get swayed by 75 paise these days.

The second question which our worthy politicians need to answer for is Rs 70,000 crore losses which we incur due to oil pilferage every year. If you recall an Additional District Collector was burnt alive by oil mafia gangs in Manmad in Maharashtra in Jan this year. What has our govt done to deal with this mafia? Why aren’t all fuel tankers fitted with GPS devices and their tanks sealed? Why isn’t distribution of fuel outsourced through a bidding process to organized transporters who have all the latest technology to track movements of each truck and who can transport fuel in sealed containers/tankers? Well, the answer to this one question will tell you that certain sections in powers that be may seem to have a stake in the way oil is distributed and/or pilfered.

The third issue is related to the oil dealership and retail outlets. This is another aspect where there is no single streamlined system. Different yardsticks are applied by different agencies to ‘allot’ and not ‘bid’ for these outlets, which can be a large source of revenue depending upon the location of proposed outlets, again leaving a lot of room for corruption. This process too has led to cartelization of distributors, and frequent strikes.

Fighting inflation has to be a synergistic efforts of all departments of the govt. If we are to really become a powerful player in the world it is of utmost importance that we learn to produce, distribute and use oil and it’s products properly and judiciously. The current knee jerk reactions to take the easiest way out are symptomatic of lack of both, vision as well as the will on the part of our govt to handle this issue.

Before I sign off I’d like to mention that with all due respect to current incumbents it is still so very ironic to see an MA in history and social science as finance minister, an MA in English as oil and natural gas minister and a law graduate as commerce minister even as the qualified economists like Manmohan Singh, P Chidambaram etc have been given other jobs which have little to do with their qualifications and experience. And don’t tell me that this argument is lame. In expert fields like finance, commerce, oil etc it is not.

Peace

Saurabh..V