High petrol, diesel prices: Government must find another way to get rich
In India, no other product links the common man with the global market directly like petroleum prices. However, even this close relationship doesn't justify the basic principles of a liberal market. In fact, it is a government-controlled liberal market in which the consumers have little say or choice. Oil is a highly costly resource and hence it is a huge source of income for the government.
Any increase in the price of oil cannot be considered an isolated commodity price hike. It leads to an increase in the price of all essential products.
Petroleum became the preferred fuel in the middle of 1950 by replacing coal. The oil crisis of 1973-74 had a huge impact on global capital flow in terms of petrodollars. It was an economic loss for developing countries and capital gain for oil producing nations. In India, administrative price mechanism, under which the government dictates the prices of a good or service, became inevitable to regulate the domestic oil sector. It started in 1997.
Kaushik Ranjan Bandyopadhyay in his paper Petroleum Pricing in India: Transition from APM to MDPM in 2009 studied the transition from administrative price mechanism to market determined price mechanism.
In 1998, the government began to dismantle the administrative price mechanism.
The idea of government-controlled pricing has a history. The period between 1939 and 1948 was a time during which oil companies made a lot of money through oil sales as the government did not intervene to regulate the prices then. The colonial forces benefited from the oil business.
In 1948, the Jawaharlal Nehru government introduced a price regulation mechanism based on cost-plus formula which was basically fixed on import parity. It was a mechanism to add all incurred costs such as ocean freight to Indian ports, insurance, ocean loss, remuneration, import duty and other levies.
Any excess money earned over the normal cost was surrendered to the government. It was a comprehensive pricing mechanism.
In 1965, the government appointed an expert committee under the chairmanship of TN Talukdar to frame guidelines for oil pricing:
a) Determine the ex-refinery prices of products produced by the refiners b) Determine the landed prices with respect to similar products which may be importedc) Assess the marketing and distribution charges of the products d) Assess the ceiling selling prices with respect to lubricants, oils and specialities
The basic observation of the committee was that price needs to be fixed by the principles of import party which could be close to carriage, insurance and freight charges. It was considered practical.
Later, another committee under the chairmanship of Shantilal Shah was set up to assess the landed cost of oil imports, feasibility of making refineries, making inland refineries, marketing, distribution and profit on distribution, among others.
The reports of the two expert committees were primarily meant to establish government regulation on prices and production of oil within the country. The oil shock of 1973 forced the government of India to constitute another committee headed by S Krishnaswamy in 1974 to assess the price.
The committee recommended scrapping of import parity and suggested the use of Administered Pricing Mechanism (APM) for the pricing of petroleum products. These attempts highlight the fact that fixing prices of petroleum products is a political process and market cannot simply do it for the government.
That was a new era in oil price regulation and also general economic growth and commodity price inflation. It continued till 1998, however, unlike the Narendra Modi government, the previous government was reluctant to implement market-determined pricing of petroleum.
There were both political and economic reasons involved.
Historically, every increase in petroleum price leads to wider political debates and is followed by inflation. It is source of revenue for the government, oil retailers and companies. As per the Petroleum Planning and Analysis Cell data, the total contribution of petroleum sector to state and central government in the financial year 2015-16 was Rs 4,18,652 crore against Rs 3,32,620 crore in 2014-15, ie, nearly 20 per cent increase in the revenue.
The logic of fixing the price of petroleum products on the daily market price of crude oil at the international level is that the consumers get the benefit of international price fluctuations.
However, instead of getting any benefits, it leads to a loss for consumers because of the government's dependence to earn revenue from the products.
Nearly 50 per cent of the cost paid by a consumer on petroleum products is actually the taxes paid to the government. How does the common man benefit from this?
Minister of state for tourism Alphons Kannanthanam made a statement that all this money goes to the poor so that they too can live a dignified life. He drew criticism for his comments and was trolled for the same.
The fact is that even Prime Minster Narendra Modi cannot explain why the tax is so high. A higher tax is justified if there are high social investments. A government that promotes privatisation has no right to impose higher taxes on products which have linkages with essential commodity prices.
The justification to scrap administrative pricing was that it benefits the rich as well. If that is the case, increase the price of luxury private vehicles.
Every increase in the price of petroleum products conceptually puts pressure on governments to intervene in the commodity market. However, under the present method of pricing, the government is under no pressure to intervene.
This is the unique contribution of the Modi government. The government is completely free from any responsibility to intervene. The onus is on the people. It is people's responsibility now to manage prices by managing consumption.
The government is becoming rich day by day at the cost of common man.