Monday, April 01, 2013

Rubbing Salt in The Wounds

Post The Steepest-Ever hike in Petrol Prices since December 2008, The Government is all set to Increase The Prices of Diesel, Kerosene and LPG. There is no Respite to The Common man’s agony.

While Buddhadev Bhattacharjee, former Chief Minister of West Bengal, failed to read the pulse of the electorate and thereby played his own crucial role leading to the historic fall of the red bastion in West Bengal; but his biting observation during the electoral campaigns that a hike in oil prices would be the Centre’s gift to the electorate soon after the elections apparently seems to have come true. Soon, after the election results of the four states and a union territory were declared, the oil marketing companies (OMC’s) guided by informal advice from the Ministry of Petroleum (to be read as the central government) called for a steep hike of Rs.5 a litre in petrol prices. While, the opposition parties, for their own hidden political motives, lambasted the government for the decision, the aam admi (common man) has been left unto himself to bear the brunt of the whammy. An approximately 56% increase in the retail price of fuel over a period of two years (the retail price of a litre of petrol in New Delhi on 15 May 2009 was Rs. 40.62, which post nine successive hikes and the Rs.5 per litre hike on 15 May 2011 is pegged at Rs.63.41) is certainly too harsh for the mass. But interestingly, the government considers that the price rise in petrol will have “marginal impact” on consumer sentiment. And laughably OMC’s argue that the increase has been “moderate”. But then, certainly it’s moderate. At least when one considers the fact that the empowered group of ministers is likely to take decision on increasing the prices of diesel, kerosene and LPG very soon. The real tough time will start only after their announcement.

While the timing of the OMC’s decision was undoubtedly a political one, the economic aspect of the decision, given the crude oil prices in the international market (hovering over $110 a barrel), can not be totally criticised. The recent hike in retail prices will help the OMC’s, in particular, to reduce their under recoveries (analysts at Bank of America Merrill Lynch estimate that despite the price hike, the absolute figure of under recoveries would still be more than Rs.1 trillion). On the economic front, while the likes of Kaushik Basu, Chief Economic Advisor in the finance ministry, and Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, argue that the increase in administered retail price of petroleum products would have a relatively less harmful effect on inflation compared to a slippage in the fiscal deficit, the opposition claim that the hike will have an adverse effect. In fact, they (Left in particular) argue that if a rationalisation of the tax structure on import of crude can be done, wherein the cess revenue earned by the government due to increase in international crude oil prices is returned to the OMC’s, then there would be no need to hike the prices and unnecessarily burden the common man. Truly so, a back of the book calculation makes it amply clear that various taxes shave off around 40% of the price of petrol. At this juncture it needs to be remembered that the taxes are levied as a percentage of the basic price of the fuel and aren’t fixed per litre. However, the government on its part is unlikely to tinker with the prevailing taxes as any reduction in taxes would definitely upset its finances and blunt its effort to keep the fiscal deficit within the set target of 4.6% of GDP.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist). For More IIPM Info, Visit below mentioned IIPM articles
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