Debate: Will Govt slip on oil slick?

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The price of petrol is up by Rs 5 and diesel is up by Rs 3. [Read Story | LPG up too] There was absolutely no alternative but to raise the price of petrol the Prime Minister said in a rare address to the nation, but the Government got it from the Right and the Left.

The Government has raised the price of fuel in an election year and predictably there has been a political furore. The Left has said that the rise in fuel prices is suicidal and has announced a week of protests. Meanwhile, the BJP has called the price hike an exercise in economic terrorism.

The question that was being debated on CNN-IBN's Face The Nation was - Fuel price hike: Is good economics bad politics?

To try and answer the question on the panel of experts were Deputy Chairman Planning Commission, Government of India Montek Singh Ahluwalia; senior CPI-M leader Dipankar Mukherjee; BJP's Economic Cell Convenor Jagdish Shettigar; and South Asia Bureau Chief, Upstream, Narendra Taneja. The debate was moderated by Sagarika Ghose.

At the beginning of the show, 71 per cent viewers agreed that good economics was indeed bad politics while 29 per cent disagreed.

UPA's Crude Bomb

The big question that everyone seems to asking is why was this hike not brought about in 2007, when inflation was low. To this Montek Singh Ahluwalia said, "The decision on timing of a hike is always a matter of judgement. Quite frankly, oil prices have risen sharply, but about a year ago, the Government was not exactly sure how far the prices would rise and how long would they stay high. I think that it is only in recent months and weeks it's become clear that the oil prices are not going to turn down and I think that an adjustment in oil prices therefore became unavoidable."

He added that the Government knew it was an unpopular measure - as the Prime Minister pointed out in his televised address to the nation. He said that it was a difficult decision.

"In my view, it is also a responsible decision and I don't think that a responsible Government could have done anything else. And I hope that responsible politicians would try and look at this hike in a sensible and realistic way, posing to the people the question 'what are the choices did the Government have'," he stated.

However, Dipankar Mukherjee disagreed with the fact that the Government did not have any other choice. He said that there were many options presented before the Government in the last three years.

"I don't think that this price rise is unavoidable. There werbne other options like the cess that we are collecting from ONGC and OIl India worth Rs 7,500 crore per year is under the Oil Ministry Development Act but is not being used for the Petroleum sector. It is being used for revenue management. we feel that this cess should be given back to the Petroleum sector," he said.

He also stated that the West Bengal Government has reduced the sales tax on fuel. "I don't understand that if this is possible for one state, why cannot the Central Government - which is getting a revenue of Rs 1,12,000 crore in this year as compared to Rs 70,000 crore in 2001-2002 from the Petroleum sector - can cut excise duties further so that there is no need to hike the prices and pass the burden on to the people."

He added that the three public sector oil marketing companies are having some problems, but no one knows what the actual losses are for the figures are not available. He said that there are private refineries which have earned profits as high as Rs 5,000 crore in 2005-2006.

"In oil refining we are self reliant. The prices of petroleum products which are being refined in the country - we are producing 140 million tonnes, last year we exported 26 million tonnes - should not be pegged on the international prices which are not based on domestic refining and production costs.

Is Petroleum Over-taxed?

The next obvious question that came to the mind after hearing Dipankar Mukherjee's arguements were whether petroleum and related products in India were over-taxed and whether only private producers are being benefitted by the Government. Also, why have excise and custom duties not been slashed more?

To this Montek Singh Ahluwalia said, "As the Prime Minister has pointed out, the effect in the increase of international oil prices has been an under-recovery using the normal criteria of pricing of over Rs 2,000 crore. This is the gap that has been created by the fact that international crude prices have gone up. The Government has therefore adjusted oil prices to the consumer to raise only about Rs 21,000 crore. They have reduced taxes. And what is more, a very large part of the rest of the price rise is going to be met by the issue of oil bonds."

He said that whether one lowers the taxes or met the deficit by issuing oil bonds, they both have a similar effect.

"The advantage of doing it this way is that we don't have to change the tax structure. In a sense, we don't know what is going to happen to oil prices in the future and so we keep the tax structure reasonable," he said.

Ahluwalia stressed on the fact that oil revenue was a very large part of the economy and it was only reasonable that oil should also pay taxes. He said that it was these taxes which were financing all of India's social expenditures.

"The UPA Government has introduced a large number of schemes that are directly aimed at helping the aam aadmi (common man) like the National Rural Employment Guarantee Scheme, the Rural Health Mission and Midday Meals. All these schemes have to be financed by taxes," he stated.

Will Oil Price Hike Spur Infation?

However, the fact of the matter is that this tax hike is going to immediately spur inflation to more heights - to almost 8.8 per cent.

Ahluwalia was of the opinion that the immediate effect of the increase in oil prices will make it look as if the price index has gone up, but he wanted everyone to consider the alternative.

"If the alternative is not to do anything - neither cut taxes or have an even bigger deficit - that would also create inflation," he reasoned, saying that the Government was fully aware that inflation was a serious problem. However, he stressed that by keeping oil prices low and financing a bigger deficit, one could avoid inflation.

He said that in such a situation, the oil prices would not rise, but other prices would rise.

"By biting the bullet on oil prices, we have ensured that other products would not have a runaway inflation rate," he said.

Economic Terrorism?

Ahluwalia said that it was not as if India was the only country in the world to suffer from inflated oil prices.

"The BJP terming this price rise as economic terrorism is nothing short of ridiculous. Prices have been raised in Sri Lanka, Malaysia, Taiwan, Bangladesh and Indonesia to name a few countries. The fact is that there is a major change in the world oil situation and a responsibly run country must recognise this. We need imported oil to fulfill 75 per cent of our needs and somebody has to pay - either the consumer, or the Government or the oil companies or the state governments," he said.

When the NDA was in power, they did not have the guts to actually bite the bullet and raise oil prices. Now that the UPA has done this, the BJP should not be attacking the Government and calling it insensitive and accusing it of economic terrorism.

To this Jagdish Shettigar said, "We phased out the administered price mechanism, the decision for which was taken by the United Front government, supported by the Left Front. At that time the domestic market was linked to the international market and the prices were reviewed every fortnight. This increase or fall in prices would have been just about 50 paise or Re1 at the most."

He said that there was another charge against the Government that the Tax Reform Committee constituted by Finance Minister P Chidambaram had recommended that there should be specific duties like in the US.

He also said that the NDA Government had encouraged bio-fuel for a large part of its reign and the UPA should not have stopped this.

He concluded that the timing of the price hike was wrong and that it is going to lead to more inflation and a further rise in prices.

What of the Ordinary Shareholder?

Narendra Taneja wanted to know that by dragging the oil PSUs down, what happens to the ordinary shareholders of the IOC and the HPCL? What happens to the stakeholders and to the overall economic health of these companies?

"If you call them Navratna companies, then let them handle the show themselves. I understand the compulsions and we all know that international oil prices are going up, but I think that these companies are better equipped and more capable to handle these things than people sitting in the Government," he said.

He also wanted to know what happens to the big plans that these companies had when they had announced four years ago that they would become global players and be ready to compete with Exxon and British Petroleum.

He asked that from the point of view of an ordinary shareholder, what would happen when a PSU was asked to shoulder a subsidy burden of RS 65,000 crore.

Ahluwalia denied that the Government had ever asked PSUs to shoulder a subsidy burden of RS 65,000 crore.

"I think that some portion of the burden would be shouldered by smaller companies making more profits and the rest is really oil bonds - a way of paying companies through the Government, except that it's not done in cash, but in bonds. The whole logic of bringing in oil bonds is a recognition that we cannot drive our oil companies to the ground. To do that would be to destroy oil security in India," he said.

But Taneja disagreed saying that basically this was a way of telling people that they do not have to pay today, but will have to bear the burden some years down the line and so it was not good economics at all.

Ahluwalia argued back saying that the fact of the matter was that around the world, countries have raised prices but not to the full extent. When you are faced with a doubling of prices in the international oil market, nobody would allow domestic prices to adjust to the full extent.

However, he agreed that in the long term, the oil companies should not be allowed to suffer. "If there are high prices in the oil market in the world in due course we will have to adjust to them. But that does not mean when you have a sudden spike, you immediately pass on the burden to the domestic economy."

Will Prices Go Up More?

The next question that needed answering was whether prices would go up more if the oil prices hit $200 a barrel.

Ahluwalia said that the Government had not yet speculated on what would happen if the oil prices would go up or down.

"Let us be clear that the only viable energy policy is that domestic energy prices have to adjust to realities in the world market," he said.

He said that not to follow a sensible economic policy was suicidal, and not as the Left parties put it that raising prices was suicidal.

"Subsidising mindlessly, refusing to raise prices when the entire compulsions to the economy suggest that one should do that, that would be suicidal. We have not simply ignored all options. There are three or four options that we are looking at. There is a big increase in world prices and somebody must bear it, but we have forwarded a very small part of the burden on to the consumer, just about 10 per cent," he stated.

He said that the rest was being distributed amongst tax reductions, oil bonds and some moderations.

At this point Dipankar Mukherjee interrupted saying, "This loss that the Prime Minister and Montek Singh Ahluwalia are talking about - this Rs 2,00,000 crore - saying it is the notional loss, it is not the actual loss. To talk of a price rise based on some hypothetical figures, it is unfair to the billion people in India."

He said that his question was specifically that in this budget when Rs 87,000 crore exemptions on excise duties were given, Rs 58,000 crore of corporate tax exemptions were given, was it good economics, was it responsible economics?

"My question is simply that crude oil cost is Rs 27 per litre and refining cost is 20 paise, then why should there be a tax of Rs 14?" he asked

Taneja agreed saying that it was bad economics and bad politics all the way.

"The fact is that the UPA has messed up. Other governments in the world - even developing countries - were much better prepared than we are," he concluded.

SMS / WEB POLL

Fuel price hike: Is good economics bad politics?

Yes: 72 per cent

No: 28 per cent

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