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WITH the elections to State Assemblies behind it, the United Progressive Alliance (UPA) government chose to go ahead with a steep hike in diesel and petrol prices, combined with a marginal reduction in customs duties on petroleum products. Given the fact that these products are universal intermediates that enter into the costs of production of a number of goods and services, the cascading effects of the price hike on the costs and prices of a range of commodities are likely to be significant. With prices of essentials already on the rise, the move threatens a return to the days when inflation was a major economic problem faced by the country.
The response from all sections of the political spectrum, therefore, has not been positive, with even the Congress seeking to dissociate itself from the decision. However, the Union Petroleum Minister Murli Deora, with the backing of the Prime Minister Manmohan Singh, has declared his intention to be firm and not accede to a request from UPA chairperson Sonia Gandhi to roll back by a rupee the Rs.4 and Rs.2 increase in the prices of petrol and diesel respectively. This has inevitably raised the question as to whether these post-hike developments reflect a conscious play-act in which the Congress and Sonia Gandhi take on the role of the defender of the common man's interests and Manmohan Singh presents himself as a pragmatic policymaker.
Suspicion on this count has been strengthened by a peculiar turn of events. In an effort to establish its pro-common man credentials, the Congress party issued a directive to Congress-run State governments to moderate the impact of the price hike on retail prices, by foregoing sales tax revenues that would be garnered on the increment in the price. This would involve a reduction in specific or ad valorem (proportionate) sales taxes levied on petrol or diesel. With many Congress State governments complying with the Central directive, pressure builds on other States to do the same.
It is still unclear whether this was an effort by the Congress president to show the government at the Centre that the party could implement its agenda without the Centre's support. However, in practice, the decision amounts to getting the State governments to implement policies that the Central government is unwilling to adopt itself. Moreover, it amounts to the use by the Congress of the control it exercises over a few State governments to create a political atmosphere where popular anger against the price hike is turned against Opposition-controlled State governments and deflected from the Centre.
Is this the reflection of a cynical form of politics, in which, in the effort to be seen as appeasing the "common man", the Congress has chosen to ignore the larger question of the pre-existing balance of economic power between the Centre and the States? Or, is it a move, which is justified by the chain of adjustments in which the so-called "burden" of an increase in international oil prices is shared by the oil companies, the Central and State governments and the people? For clarity, it is useful to take up the latter question first.
The government's case for an increase in prices is posed in a manner that suggests that there is no alternative. International prices are well above their level at the time of the last price hike in September 2005. This, it is argued, necessitates an across-the-board increase in prices. While there is a case for the state to insulate the people from the adverse impact of global developments, this argument should apply only to the needy. Hence, while the price of kerosene sold to the population below the poverty line and that of liquefied petroleum gas (LPG) consumed by the common man need to be frozen, an increase in the prices of petrol and diesel is necessary.
If domestic retail prices are not adjusted to reflect changes in international prices, the resulting loss would show up in the accounts of the oil marketing companies (Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP) that obtain their supplies of petrol and diesel from the refineries at prices that equal their import price inclusive of customs duty. According to official estimates, if retail prices are not raised, under-recoveries by the oil marketing companies would touch Rs.73,500 crores in the current fiscal year. Since this is not an acceptable situation, the burden, it is argued, should be shared by the upstream oil companies (the Oil and Natural Gas Corporation, the Oil India Limited and the Gas Authority of India Limited) and refineries, which receive prices that more than compensate for costs; the Central government, which garners revenues in the form of customs duties and excise duties (besides dividends from the oil majors); the State governments, which benefit from sales taxes; and the consumer, who is shielded partially from the full impact of international prices.
The principle on how the burden should be shared was worked out by a committee headed by C. Rangarajan, former Governor of the Reserve Bank of India. The committee spent much of its energies on the different stages through which imported and domestic crude is converted into petroleum products supplied to the consumer, and the cost escalation that arises as the raw material passes through these stages.
It found that the upstream oil companies (or oil companies other than the oil marketing companies, such as ONGC, OIL and GAIL) had recorded profits to the tune of Rs.15,600 cores in 2004-05 and Rs.14,600 crores in the first nine months of 2005-06; that the oil industry's contribution to the Central Exchequer in terms of duties, taxes, royalty, dividends and so on rose from Rs.64,595 crores in 2002-03 to Rs.77,692 crores in 2004-05. That the petroleum sector alone contributed around two-fifths of the total net excise revenues of the Centre; that, taking Delhi as an example, Central and State taxes amounted to 38 per cent and 17 per cent respectively of the retail price of petrol and 23 per cent and 11 per cent respectively of diesel; and that the incidence of taxes as a proportion of the retail price in India was higher than in the U.S., Canada, Pakistan, Nepal, Bangladesh and Sri Lanka, though they were lower than in many countries in Europe known for their higher average level of prices.
Thus, an examination of the numbers suggest that there is an adequate buffer to shield domestic consumers from the effects of the increase in international prices so long as segments that have alternative sources of resource mobilisation and thus can afford to take a cut in petroleum-related revenues are willing to accept such a reduction. By all accounts, it is the Centre and firms controlled by it that are currently in that position.
Yet, at the margin it is the consumer and the State governments who have been called upon to carry the additional burden. It is indeed true that the State governments also benefit significantly from the petroleum sector, even if much less than the Centre. Having a limited set of taxes they can levy and under increasing pressure from the Centre and the most recent Finance Commission to set their finances in order, State governments have, to varying degrees, been increasing their reliance on taxes on petroleum products. According to the Rangarajan Committee, the amount garnered by the State governments from the petroleum sector has risen from Rs. 32,156 crores in 2002-03 to Rs. 43,254 crores in 2004-05. While, faced with a crunch they can be called upon to sacrifice some of this, they should be the last to be touched because the alternatives available to them for additional resource mobilisation are limited.
Not surprisingly, one of the recommendations of the Rangarajan Committee was that the Centre should shift out of ad valorem excise duties (revenues from which rise with prices) and fix the Central excise duty at a specific rate of around Rs.14.75/litre for petrol and Rs.5/litre for diesel. This recommendation has been ignored, though the recent price hike and customs duty adjustment (from 10 per cent to 7.5 per cent in the case of petroleum products) was substantially based on the recommendations of the committee. Our calculations suggest that if the recommendation on excise duties had been accepted, the price increase would have been less to the extent of 80 paise in the case of petrol and Re.1 in the case of diesel. If further adjustments in duties and taxes and upstream oil company profits had been made, the price increase could have been much lower than the one imposed.
Rather than resort to these means, what the Centre has done is to reduce the subsidy on kerosene by targeting it at below poverty line (BPL) households, raise the prices of diesel and petrol significantly and share the remaining subsidy burden with the oil companies. In addition, it has stated that once international prices cross $75 a barrel, the final consumer will not be shielded against price increases. Rather than experiment with options to moderate the increase in petroleum product prices and reduce its inflationary impact, the Union Cabinet has chosen to be concerned only with protecting its own revenues and the dividends it obtains from the oil companies. And, possibly, unable to discipline its own Ministers, the Congress has chosen cynically to shift the burden of adjustment at the margin onto the institutions with the weakest financial position - the State governments.
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