The logic (or the lack of it) of fuel price hike

SO, the fuel price hike has finally been announced, barely two weeks before the presentation of the Budget for 2008-09. Dr Manmohan Singh, our PM, says the price rise of Rs 2/- and Re 1/- for petrol and diesel respectively, is 'marginal" and that if the Government continues to provide subsidy, the fiscal system would collapse.

Of course, both the BJP and the Left have taken a diametrically opposite view of the price hike which they say is totally unjustified and have announced plans for protests. On the one hand, we see the Government taking credit in not having raised the fuel prices over the last 20 months, despite that the crude price has risen by 50% this year, as compared to 2007. On the other hand, we have the BJP and the Left, which rule several states, taking it to the streets. Thanks to its own making, the Congress has given the BJP and the Left, a common stick to beat it, with.

Now, the question is… is the Government justified at all in raising fuel prices at this juncture? For answering this, we would need to understand that the process involved in the pricing mechanism for petroleum products in the country is very complex involving a lot of intermediaries and players. The Central Government either imports crude or procures crude from the domestic companies. There are refineries who use the crude and produce the intermediate and final products like petrol, diesel, etc. Then you have the Oil Marketing Companies ('OMCs") which market the petroleum products. There are the State Governments which levy VAT, Entry Tax and other commercial levies. Of course, the Central Government rakes in significant revenues in terms of customs duties and other indirect taxes. The final player in the distribution chain is, of course, the poor consumer, who bears all of these taxes that are levied and collected from the point of the import of the crude till the delivery of the petrol or diesel in the local petrol pump. The Government justifies its decision to increase the fuel prices on the fact that the international crude prices have increased significantly over the last 15 months or so. What it conveniently covers up or refuses to tell the Indian consumer is the fact that, it is taxes that push up the cost of petrol and diesel and the increasing international crude prices is only one of the elements of this jigsaw puzzle.

Let"s not get into complex issues like the Import Parity Pricing ('IPP") which the Government follows, in respect of select petroleum products. It would suffice for the reader to know that the total amount of the various taxes that are collected, in respect of petrol and diesel, work out to an UNBELIEVABLY HIGH 55% to 60% on the final price. Of course, if you work backwards, you will easily find out that the levy of taxes is to the tune of more than 100% of the base price. Thus, if a Bangalore resident pays Rs 39 for a litre of diesel, something like Rs 21 would have been collected as taxes by the Central and State Governments. The problem then, is not so much to do with the international prices of crude, as it is, to do with the taxes that are levied which make it so expensive for the Indian consumer? To blame the international crude prices without looking at the taxes that are levied, is plain hypocrisy.

Pakistan does not have a robust economy like what India has…. Pakistan does not talk of the growth rates that we are so proudly talk. Yet, the Pakistani consumer pays much less for petrol and diesel, as compared to his illustrious Indian counterpart. Like India which imports two-thirds of its requirements, Pakistan also imports most of its requirements. Then how come the Pakistani consumer only pays around Pakistani Rupee PKR 38/- to a litre of diesel, which is equivalent to about Rs 23 /- to Rs 24/-. While there could be issues related to the grade of diesel, etc. the fact remains that the price differential is at least about 30%, which is really significant. Some economists might say that the Indian consumer earns more and hence has to shell out more. Wrong, Sir. Take, the case of Malaysia, a more affluent country, where the consumer pays much much lesser, as compared to even Pakistan. Malaysia incidentally is on of the countries where fuel is really cheap.

The underlying fact is that all countries procure crude at international prices and subsidize for the benefit of their consumers. The recent fuel price hike, the Indian Government says, is to cut down on the losses of the 'Oil Marketing Companies"? China faces the same problems in terms of the surging import prices and its curbs on the retail prices and several Chinese oil producing and marketing companies are reported to be in the red.
Coming to Pakistan, surely, with international crude prices going at around US$ 92 for a barrel, it is very likely that a smaller economy like Pakistan will be hit harder, as compared to India, which has a much larger and growing economy. India has had the added advantage of having an appreciation currency which means that, there is a 15% odd price advantage which India has gained over the last few months, vis-À-vis its imports. Does the Government then have to necessarily increase the selling prices of petrol and diesel, to ensure that the fiscal system does not collapse, to use the PM"s words?

Perhaps, not.

The Government could possibly reduce duties and taxes to ensure that the fuel prices do not go up any further, by involving the States. Afterall, the reduction on duties and sales taxes should involve both the Central Government and the State Governments. The BJP and the Left, not withstanding their protests, can do something more meaningful and helpful. After all, they rule several States and can take the first step in reducing the respective sales tax and entry tax rates, which would immediately result in lesser retail fuel prices. Especially, the Left, which seems to protest any fuel price hike, irrespective of whether the NDA or the UPA rules, can think of doing something which is more meaningful, in the two States that they rule. What prevents the CPM Government from exempting petrol and diesel from the commercial taxes that are levied, which would result in a very significant fall in the petrol and diesel prices in West Bengal and Kerala, is any body"s guess.

Jokes apart, what is required is a medium to long term strategy aimed at providing petrol and diesel to the Indian consumer, at fair prices. Both the Central and the State Governments and the political parties need to realize that the Indian consumer can no longer be fleeced to such an extent that he has to pay 30% more than his Pakistani counterpart. There are, of course, other issues, arising out of the reduction of duties and taxes on fuel, in terms of the impact on the tax revenues, etc. With a booming economy and impressive tax collections, India is much better placed to handle the situation.

History has given Mr PC, the opportunity to take a fresh look at the fuel pricing methodology in India, when he presents the 2008-09 Budget. Given the current buoyancy in tax collections, let"s hope that he comes out with an 'out of the box" solution.

As some wise man said 'Logic includes the lack of it". The recent fuel price hike announced perhaps, is a classic example of this.

One last word, though. Where was the tearing hurry for the Government to announce the fuel price hike just two weeks before the Budget? Having waited for 20 long months, couldn"t they wait for two more weeks? Doesn"t the announcement undermine the whole Budget preparation exercise?