News

THE POLITICS OF OIL

By Sanjay Jha

Oil has always been a slippery subject, in India it assumes an even more electric slick avatar as everyone pounces at the slightest provocation to its regulated suppressed price. It’s customary practise; we prefer a deceptive stealthy trick of small changes to an upfront admission for hard revisions. Of course, it makes for smart politics and good optics, even if commercial logic be damned. In a sense, we encourage a subtle imperceptible stratagem to brutal transparency. Thus, the reaction to the Rs 7.50 p increase announced by oil Public Sector Undertakings ( PSUs)’s was as expected; all hell broke loose and on the Star TV panel discussion a pompous BJP spokesperson seemed so exasperated by my supposedly animated arguments justifying price hike he threatened to boycott the poor channel itself. Extreme emotions running sky high, but mostly empty rhetoric, “ gas” if you please. . Fact is a price hike is a Hobson’s choice for the government. Or for that matter any government .

India is going through a phase of preposterous , conflicting expectations; if 2G is to be freshly auctioned ( to correct past misdemeanors) , expect a tariff hike. But we start complaining instantly ; you can’t have the cake and eat it too. . If India is to ameliorate living conditions of its sizeable  underprivileged class and increase welfare allocations in the social services sector, we will have to gradually rebalance subsidies and increase taxes too. You can’t make an omelette without breaking eggs.


Let us take a look at hard numbers; at  a product-wise under-recovery, it is

Rs 13 per liter on HSD

Rs 480 on LPG

Rs 32 on SKO.

That’s not small change, it is a large black hole in the depleting treasury manifested in rising fiscal deficit . Significantly, diesel contributes 55% of our overall subsidy burden, where the next tough call is inevitable. In terms of levies as a percentage of consumer price it is as follows:

MS—45%,

HSD —23%,

SKO -3%,

LPG-2% .

It is easily discernible even to the half-blind that there is a pattern to the tax structure based on end-user application. But honeymoons are never infinite.

Those who cite the Goa government reducing its sales tax miss the point; the CM is just following the policy of liability transfer based on perceived revenue earnings from different sources. If he does not succeed, the Goa government will be soon in a bad debt trap, it could be just another populist stunt.  Seriously, if you remove taxes ( central excise) , where does  the government get compensating revenue from ? Somewhere, somebody has to pay. Since it is an inelastic essential commodity, no sincere government will exploit its revenue potential by taxing the vulnerable sections of society as it is committing political hara-kiri. Remember in India, subsidies exist as a soft substitute because we don’t have a social security net, unlike the western nations.

To understand the gargantuan impact of oil price hike , just look at the  Oil Marketing Companies and their staggering losses on account of under-recovery in 2011-12

HSD  : Rs 81192 cr

Kerosene: Rs 27352 cr

LPG          Rs 29997 cr

Total           Rs 138, 541 cr

By the way, these oil companies are listed companies with large market capitalization and have savvy shareholders too. Tell me, does it make rational commercial sense to perpetuate subsidies? Petrol ( already decontrolled) and diesel need to be urgently made mark to market; let there be fortnightly adjustments, either upwards or southwards depending on global oil indices and other economic variables.

The fact is China and India are both oil guzzlers thanks to explosive GDP growth , and are buying barrels far above global average oil consumption. That both the giant economies are seeing an auto industry revolution tells its own story. By keeping an artificially reduced price we are causing an increased MS/HSD demand , a dangerous addiction which is realistically unsustainable. SUV and fancy sedan users are conspicuous consumers of HSD. Worse it becomes a hot political potato exploited through cosmetic protestations such as Bharat Bandh etc.

With over 90% of our oil import bill at  USD 150 billion last year India is as vulnerable to external economic conditions as a cat to cheddar cheese. A depreciating rupee can accentuate matters. There is no escaping that oil companies need to invest significantly in alternative fuels research, even as we conserve oil and restrict its unchecked appetite through enhanced prices. It will help if states and the central government work to improve public transport systems. It will drastically reduce two-wheeler travelers, road congestion, environmental damage and oil consumption.

The price of many other commodities rise exponentially higher, but we live in a world of high optics. In our oil dynamics, there will never be a sweetheart deal between the oil companies ( upstream or downstream) and the retail consumer. We have to be braced, seat-belts tight for a mid-course correction. There in no need to beat around the bush, we are in a doghouse if we perpetuate subsidies; it must dissipate though in gradual installments, and must be as painless as possible. Yet the writing is on the wall. It will be tough but it is time we took the bull by the horns.

The opposition , particularly the BJP, is accustomed to running with the hare and hunting with the hounds; a bundle of contradictions. So what would be their alternative game-plan or panacea for solving India’s economic challenges? NOTHING! The Bharat bandh is an extended performance of their classical political theatrics. We need to condemn such ludicrous waste of national energy ( pun intended). Ironically, to conserve energy India needs to burn the midnight oil.

You can follow Sanjay Jha at Twitter@JhaSanjay

Advertisements

3 Comments on THE POLITICS OF OIL

  1. Sir,
    Very well written article, but i would humbly disagree with some points, Oil price increase even ten times more would not help the PSUs due to the simple math that taxes are same even on the increased price.please refer to a broad working on old fuel prices below that i have done below
    Basic Price: Rs 28.93
    Excise duty: Rs 14.35
    Education Tax: Rs 0.43
    Dealer commission: Rs 1.05
    VAT: Rs 5.5
    Crude Oil Custom duty: Rs 1.1
    Petrol Custom: Rs 1.54
    Transportation Charge: Rs 6.00
    Total price: Rs 58.90
    Based on the above calculation the price of crude is only around 36-40% of the total price that we pay at the pumps
    Considering that the current price of crude oil is $107 per barell,

    Cost of per barrel in RS will be 107*45.40 ($1 = Rs45.40) = 4858.

    One barell consists of approximately 160 litres.

    So Price of crude oil per litre will be 4858/160 = 30.36.

    Now Indian Oil Company loses 1.43 Rs per litre + cost of transportation of crude oil and refining the price.If the oil companies are at a loss, then how is it that they declare high dividends for their share holders?In the year 2008-2009 Hindustan petroleum company had a net profit of Rs: 574.5 crores, similarly in 2009-10 Indian oil had a profit of Rs: 5556.77 crores and Bharat petroleum had a profit of Rs; 5015.5 crores. If these companies had incurred a loss, then where from, they got this profit?IOC, gifted their current employees and retired employees gold coins. So then, how can a company that is projected to suffer losses of several crores per day give such large gifts?
    I wouldn’t get into the political angle that you mentioned as i believe you would have done the same thing if you were in opposition
    I might be completly wrong, partially wrong, or partially right..i trust you to educate me on that.
    Regards,
    Rahul

  2. Phones can save fuel, time and effort.
    Auhor: P. Abraham Paul Dated 15 May 2012

    Introduction: People around the world, especially those in the developing countries are reeling in financial burden due to rising cost of living without commensurate increase in per capita income. The gross inequity in the distribution of wealth and resources and wide divide between rich and poor magnifies the malice multifold. It is highly disheartening to see the humanity in spite of quick advancement in every field during past few decades is unable to find methods and solutions to get over this sad situation. Over and above the path of growth greatly cause to degrade the harmony and wellbeing of the nature and environment we live.

    1. Over exploitation of natural resources and is extensive consumption have become greatly harmful to the extent that the future of humanity is under perennial threat. Digging out expending coal, oil and natural gases and metal ores are causing unbalance in Earth’s eco system and pollute the environment. Therefore, it has become immensely important to find alternatives to get over these problems before it is too late.
    Top priority goes to alternate energy by switching over to Solar, Wind and Tidal, Bio energy while developing and usage of systems and products that can work on lesser energy.

    Other area of priority is to use IT based products and services to reap its full benefit for the betterment of humanity. One such opportunity is to deploy modern era Information Communication systems and networks enabling people to save on fuel time and effort.

    With modern means of ICN, it is possible to do most of the types office jobs sitting at ones home. Large array of Phone based services, both with Mobile and fixed are now available, accessible and affordable to common man. Various forms of money management and receive and pay by phone services enable all sorts of day to day money transactions using phones at any time from anywhere.

    Please see my blogs on this topic in http://www.paulsblog.wp.com

    2. Money management using phones as a service can take care of easy payment mechanism to directly transact (receive and send) virtually all form day-to-day micro/macro e-payments such as salary / pension of employees, all sorts of government’s welfare payments, pensions, payments related to Right to food, Right to Education and health care, interest / dividend payments on deposits, Payment for utility bills, taxes and service charges, School and College fees, Payment to job contractors and job workers, by employers to employees, Bill payment in shops, sales outlets & malls, cinema halls, petrol bunks, various travel ticket vendors and vending machines, taxi and auto fares, road and bridge toll payments, quick transfer of money to friends, spouse, pocket money to children, small personal and business money lending, transactions with Micro-finance agencies and franchisees, crediting money into bank and Post office accounts etc., without involving banks, post offices credit card companies and other money transfer agencies.

    As most of the day-to-day money transactions could be done sitting at home/office or from anywhere any time without need to commute and therefore will help to save time, fuel and reduction in road usage, traffic congestion and pollution.

    With more and more money management done with e-transactions like Pay by Phone (PBP) method, printing of money need be less and can save a lot to the exchequer.
    Pay by Phone systems can become an effective tool to realize ‘Financial Inclusion’ of people in the lower strata. There is a need to urgently implement non-banking and non- internet dependant solutions to realize financial inclusion of people in the lower social and economic strata. The banks, both nationalized and private are white elephants always with an eye on profit rather than service. Whatever said and done, banks will not be able to effectively serve people in the lower economic strata in urban as well as rural areas. Even with Banking correspondents, formal banking procedures are not user friendly for illiterate and poor customers especially for the women and aged. Similarly, services of most of the Micro Finance Institutions are also unaffordable to people in the lower economic strata. Various pay by phone systems would make micro money payment facility available, accessible and affordable to everyone; including people in the lower economic strata at an individual level who is able and eligible to have phone in urban and rural areas.
    For example: A person can avail loan against his small gold deposit with the Service provider, can get a credit in his account, use it and pay it back with nominal interest, in installments any number of times from anywhere any time transparently without any human intervention.

    Crediting money into users account can be done using pre-paid coupons available from franchisee outlets or by transferring money from Post office or bank accounts to PBP account or through any other PBP user from their account. For example money can be transferred from PBP account of spouse or parent to children or between friends..

    Solar powered energy to support the phones and other user end devices in the POS. To make available the eco system to power Mobile phones and Set top boxes at user premises where regular electric supply is not available or cannot be afforded by villagers in rural areas, solar powered mobile phone chargers etc., to be provided at subsidized cost. Facility for free charging mobile phones could be provided at public places, post offices, panchayat offices, bus stations / Rly stations. etc.

    Hard cash can be obtained at PBP franchisee outlets or from PBP cash vendors on nominal discount. By transferring money into their PBP account.
    PBP Service can be extended to Land Line phone users. PBP service such as payments of Utility bills, Service charges etc and transfer of money to any PBP user account can be extended to Land Phones also as the numerals, * and # keys used in USSD messaging are available in land line phones. IVRS incorporated with PBP system can take care of the transactions between Land Phone and PBP system.

    3. The business part: PBP deals being virtual e-transactions, and therefore, most of the real money remains within the PBP system. This opens out enormous business potential for various stake holders associated with PBP business.
    There will be above billion phones in India soon. With a modest assumption of a monthly average of Rs.10000/- transaction per phone, the annual turn around of the business will be a mind bogging sum in hundreds of Trillions. The huge excess liquidity available with PBP Service provider can be profitably deployed in various instruments of money management products within regulatory norms.

    PBP service can be provided free of charge to users. With above business logic, it is possible to provide PBP service free of cost to users which will make the system popular with all types of phone users that will enhance PBP usage.

    Share of revenue for stake holders. With the enhanced money business from this un-banked value added service, there will be enough profit share for various stake holders, the Telecom service providers and others, involved in PBP business.

    Un-banked Mobile Money Management is a must, but need to be regulated. Setting up of disparate Money management systems, product and services by various parties without any regulatory arrangement will not deliver desirable results especially for financial inclusion and empowerment of people in the lower strata across the country. Therefore, government should take immediate steps to bring un-banked money management service under regulatory controls through National Payments Corporation of India (NPCI) under the ambit of RBI.

    4. Success of PBP service depends on the following aspects:
    PBP system shall provide service to all Service providers across the country.
    PBP shall be a common centralized system that shall be available, accessible and affordable to all types of users.
    Since the system involves high volume of very low value money transactions, the service shall be without any additional charge. Any cost involved on service shall be compensated by profitably deploying the liquidity available to them in the operation process.
    It is necessary that PBP subscribers, utility providers, vendors, shops, banks, Post offices etc involved in PBP service are able to deal with a common PBP service provider, to make the service simple, user friendly and efficient, and to become profitable and effective.
    Therefore, to make the system and service succeed, the money management system should be able to offer universal service anytime, anywhere, for every form of payment. To realize this, the PBP system shall be ideally a common, centralized, stand-alone, third party system that is set up by the consortium of Telecom service providers or by a third party on revenue / profit share basis with the stake holders involved.
    A solution to resolve this impasse between Government and telecom Service providers is to have an exclusive banking system associated with the PBP service providers that is set up as a 3rd party system by the consortium of PBP Service providers and controlled by NPCI under the ambit of RBI.
    ————————————————————————————
    Abraham Paul. P
    Ex: Vice President (TS) SPCNL, SIEMENS ICN / G.M & SMT TBG BPL Mobile, TES (I) DOT India. papaul@gmail.com

  3. The numbers you provide in your article do not make one wiser – not a layman like me at least. The left has asked why the Govt can not forgo the incremental duties/taxes on petrol. The increase in price of petrol from 2009 July to now is about Rs.32/- per ltr. Considering that almost 50% of the price is taxes and duties (as every one says), Govt makes an additional revenue of of Rs.16/- on the sale of every litre of petrol. Layman thinks Govt must forgo that or is it that the Govt is depending on this additional revenue to reduce the fiscal deficit. If the Govt is willing to forgo half of the additional revenue there is no need for a price increase. To that extent subsidy on diesel may be reduced. Layman’s maths says so.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: