The real game in Diesel Pricing

A major hike in the price of auto fuels, particularly diesel, is once again looming large. The justification cited is the latest Kirit Parikh panel recommendation. Unlike petrol, hike in diesel price doesn’t just affect an SUV or a diesel car owner, but each and every citizen of the country. Diesel is used as a transport fuel — for both road, as well as, rail transport. Besides, in a severely energy-deficit country, diesel is also used as farm fuel for tractors/ to run pumps for irrigation and other farming activities; industrial/ commercial activities as furnace fuel/ to run gen-sets and fuel for water transport-used by fishing trawlers as also large merchant vessels and cruise liners.

So a hike in diesel price affects each and every activity, from transport to manufacturing to farming. Obviously the increase in input cost gets transferred to the consumer and that leads to a cascading effect on economy. To understand it better let’s take the example of a small-scale vegetable farmer. He would have used diesel for farming activity to transport his produce to the market and every increase in diesel price would increase his input cost multiple times. To maintain his meagre livelihood he would have no option but to pass this increase to the final consumer i.e. you and me. This perhaps will help one to understand the current food inflation scenario better.

The Kirit Parikh panel incidentally is the fourth such body (since the Congress-led UPA came to power) which is propagating the idea of “evaluating and recommending the price mechanism of petro-fuels”. The previous three were:

1. C. Rangarajan Report: 2006

2. BK Chaturvedi Report: 2008

3. First Kirit Parikh Report : 2009-10

A cursory reading of the above three reports is enough to deduce that their recommendations are consistent. All the committees recommend “freeing of pricing of petroleum fuels”, which incidentally are in line with the process that was initiated and institutionalised by the BJP-led NDA Government as early as April 2002.

Keeping its commitment to liberalise the petroleum industry, the NDA Government had dismantled the ‘Administrative Price Mechanism (APM)’, which was essentially the beginning of the process of removing Government control over pricing of petroleum products. This was necessary for three main reasons: Ending the inefficiency and Government stranglehold on the oil sector by allowing competition; attracting capital investment and reducing subsidy burden to free exchequer.

So committed was the NDA Government to free the oil sector of control that from 1 April, 2002 till 2004 general election, it revised (increase/ decrease depending on international crude price parity) the prices of petrol and diesel almost every fortnight. Had this process been continued by the subsequent UPA-I and II Governments, the petroleum industry would by now have been free of subsidy burden and the prices of petroleum fuels would have been competitive because of presence of private players in the industry. However, as they did in every other sector, the Congress-led UPA Government immediately did away with the reforms brought about by the NDA regime and took complete control over the prices of petroleum fuels. The Congress kept citing coalition compulsions for not bringing about reforms in pricing of petro-fuels as the Left and Trinamool Congress were their allies. However, even during UPA-II regime, when they were free of any such burden, Congress did not bother to implement reforms repeatedly recommended by the three aforementioned committees, ironically appointed by the Congress itself.

Indeed the NDA Government had brought about not only pricing reforms in the oil sector but also introduced many revolutionary steps to liberalise the sector, some of them being:

Waiting lists for obtaining cooking gas connections were done away with and new connection availability was made across the counter.

Selection process for appointing petrol pump and cooking gas agency operators was made transparent by disbanding the corrupt Dealer Selection Boards, a relic of the previous Congress era which mainly benefited cronies of the ruling party.

The NDA Government initiated the process of disinvestment in the oil sector which again was put on hold by the Congress-led UPA Government.

In the absence of reforms in petro-fuel pricing, investment as well as participation by private companies, which had well begun by 2004, dried up. The need for rationalising the tax structures, which were recommended by various committees, was overlooked and the sector continued to reel under a tax structure which takes away the major chunk from the price that consumers pay for the product. While various States have different tax rates for petrol and diesel ranging from as low as 15 per cent to as high as 25 per cent, the Union Government also scoops a large chunk of the revenue in the form of customs and excise duty.

Had pricing reforms been implemented in the sector, the Union Government would have been required to forgo its share of huge kitty of several thousand crores with which it sponsors its unproductive schemes through which money only leaks and reaches cronies and middlemen.

With increasing crude price and declining rupee value in terms of Dollar, diesel, as mentioned above, being the major transport/ industrial fuel, could have been put under the category of ‘declared goods’ thus forcing all the State Governments to rationalise tax rates for it. But the Government did none of these. Instead, earlier this year, it took some regressive and retrograde steps which have not only increased the burden on the common man, exposed the oil industry business to poaching, but in an unprecedented act of not revealing full truth, instead of reducing the tax burden, the Government increased it on the common man’s fuel.

In September 2012, when diesel price was increased by a whopping Rs. 5 per litre, (the partial effects of which are now being borne by public in the form of double-digit inflation), instead of reducing the burden by cutting into its own share, an excise duty increase of Rs. 1.5 per litre was in-built in the Rs. 5 per litre increase. The impression that was sought to be given, however, was that the hike was only necessitated to meet the under-recoveries of oil companies and the entire Rs. 5 increase was on account of base rate and will go to the oil companies reeling under the impact of high crude price.

As if this was not enough, in yet another major act, the Government introduced, in January, 2013, dual pricing of diesel hitting bulk consumers like Army, Railways, State transport corporations, power plants, industries etc, by charging a price higher by as much as Rs. 14 per litre for the same product, compared to the diesel sold by petrol pumps to retail consumers. This has opened a new window for black-marketing and corruption as instead of paying a higher price to oil companies, many industrial customers and transporters now buy diesel from retail petrol pumps at a mutually agreed higher price than the official prevailing retail price, but substantially lower than the PSU bulk price, thereby reducing bulk sales of PSU’s but increasing profit of retail petrol pumps. In addition, it has also thrown major consumers like Army, Railways and Shipping companies open for poaching by private oil companies. Would not private companies, now able to access such large consumers hitherto inaccessible to them, be amenable to funding the “relevant” political parties? Would not retail petrol pumps, now making windfall profits, be a source of black money funding to “relevant” political players? Indeed, like every sector under Government control, there is much more to diesel pricing than what meets the eye.

In summation, while the inflation will further go up with increase in diesel price, PSU oil companies will continue to be in red when the year closes because of the mess created in the sector by the disastrous policy mechanism of the Congress-led UPA government.

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This article was originally published in Niti Central on 11th November 2013. Here is the link:

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