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09 July 2008

UPA Slipped On Oil

And it bluffed about the 'inevitability' of fuel price hike when it indeed had other options, reports Dibyendu Das

Fill it, shut it and forget it! This once-famous slogan from an advertisement of a motorcycle seems to be the motto of the UPA Government as it has conveniently set aside the worries of the poor and the middle class reeling under the pressure of the recent hike in the prices of fuel for transportation and cooking gas.

While global oil prices climbed record high this week pushing the benchmark Indian basket to the year's high of $76.13 a barrel, the troubled UPA coalition at the Centre abandoned thoughts of raising fuel prices, withdrawing the subsidy on cooking gas for the non-poor.

The Indian basket comprises Oman-Dubai sour grade and Brent dated sweet crude in a 60:40 ratio. It is the government-owned oil companies that will bear the brunt of Rs 5.75 a litre loss on sale of diesel, Rs 3.35 on petrol and Rs 15.47 on kerosene and Rs 174.75 on every cylinder of LPG. The petroleum ministry had earlier this month, through a status report meant for the Prime Minister and Cabinet, drawn the government's attention to domestic oil marketing companies losing heavily because of the growing mismatch between global and domestic fuel prices. However, Petroleum Minister Murli Deora ruled out any hike in domestic fuel prices.

A senior government functionary said that the government was struggling with the difficult task of political management over the India-US civil nuclear deal and the Ram Setu row. "It has little political capital to expend on taking the hard and potentially unpopular decisions of increasing fuel prices," he rued.

More than the price hike, it is the lack of political will to issue oil bonds to the companies for compensating losses that is disturbing their investment plans. "Normally, the administrative ministry pushes the case of petroleum companies for a hike when it sees they are in the red, but the response of the Ministry for Oil & Natural Gas is timid though it is well known now that oil marketing companies Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum may close the second quarter with losses," said a senior official from the ministry.

Government sources said the ministry had been told that the hike in consumer prices of petroleum products was not a viable option in the current political situation facing the government, but at the same time no alternative mechanism has been worked out. Parliament's monsoon session ended without the government getting approval for oil bonds to compensate for around Rs 50,400 crore annualised losses.

"Fuel price hike is a difficult political task at most times. It is more so now," said a minister engaged with the current trouble-shooting efforts with the government's Left allies on the nuclear issue. Decisions such as hiking the prices of petrol and diesel and cutting subsidies on cooking gas would require consultations with not only the Left parties, which are bound to see red, but also within the UPA coalition. UPA constituents including RJD and DMK are not in favour of any increase in fuel prices now.

"With inflation staying below 4% for the latest four weeks, there was perhaps a window of opportunity to pass on to the consumer a little bit of the burden of the global oil price increase," said a Finance Ministry official, adding, however, that "the government is politically not in a position to bite the bullet. It has no appetite for opening another front (of confrontation within the ruling coalition)."

Opposing any increase in petroleum prices, the CPI(M) refuted reports that it had been kept informed by the government on the matter and announced plans to coordinate with the left and other parties to launch a nationwide agitation in case of a hike.

"We are totally opposed to any rise in prices of petrol, diesel and cooking gas... We don't want to negotiate on this matter. If they (the government) want to discuss cuts in duties (on oil products), we are ready to discuss (the issue)," party General Secretary Prakash Karat had explained.

As for the reports of petroleum minister Murli Deora saying that the Left parties had been kept in the loop on the proposal to hike prices, karat said, "He has not spoken to any one of us." Demanding cuts in the customs and excise duties on oil products by the Centre, he suggested that the state governments also carry out similar cuts. "On our part, we have asked the (left-ruled) governments in Kerala and West Bengal to see what can be done." Karat said that the government should first cut duties on crude and petroleum products.

The reporter is a member of the Communist Party of India (Marxist)

The government has said that the price hike would lead to additional earnings of Rs 21,123 crore for the Public Sector Oil Marketing Companies (OMCs). This amount can be easily mobilised to provide relief to the OMCs by doing the following:

  • Rs 7500 crore per annum cess collected from ONGC and Oil India Ltd. under the Oil Industry Development (OID) Act, 1974, which is not being used for the development of the petroleum sector, can be used to create a Price Stabilisation Fund, from which the OMCs can be compensated.
  • If excise duties on petrol and diesel are cut by Rs 3/litre instead of Re 1/litre as has been done presently, a further relief of around Rs 12,000 crore can be provided to the OMCs.
  • According to the Statement of Revenue Foregone in the Union Budget 2008, the government is estimated to have lost Rs 87,992 crore in excise duty exemptions and Rs 58,655 crore in corporate tax exemptions in 2007-08. The government would not lose any revenue on account of the tax relief given to oil companies if it can phase out 15 per cent of these huge corporate and excise duty exemptions.
  • According to the Annual Report of the Reliance Industries Limited, its profit from the refining business has increased from Rs 5915 crore in 2005-06 to Rs 10,372 crore in 2007-08. Not a single paisa of tax has been paid out of these profits, which have nearly doubled in two years. A windfall profit tax of 20 per cent on such profits from refining as well as oil and gas exploration can help in mobilising at least Rs 2000 crore.

The astronomical figures for under recoveries of OMCs that are being projected as their losses by the government are notional figures. They are not actual losses. The government should realise that in a global context where price of crude oil is reigning at a high level, the only sustainable solution lies in restructuring duties on petro products and having a transparent pricing policy whereby the OMCs as well as the refineries do not retain hefty profit margins. What is at stake today is not the market capitalisation of the oil companies but the livelihood of the working people who are already suffering from back-breaking inflation.

Courtesy: People's Democracy

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Surajit Dasgupta treats no individual, organisation or institution as a holy cow.