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TO HIKE OR NOT TO HIKE?
DIRTY 'CRUDE' POLITICS
By PRAFUL KHANNA / New Delhi
To hike or not to hike? As crude soars in global markets, the Indian consumer is bound to bear the brunt. But backroom politics may ease the blow. India’s oil ministers have always found themselves on slippery ground when it comes to raising fuel prices. Murli Deora is no exception. For several months now, the minister doggedly refused permission to oil firms to raise motor fuel prices even though India’s crude cost climbed to over $90 per barrel in 2007, from an average of $65-70 around June 2006 when prices were last raised.
But the situation changed on January 3 when crude touched the $100/barrel rubicon on the main US commodities market, New York Mercantile Exchange. Though it came down after one trade, the rates have refused to slip below the $90 mark. At home, the four oil marketing companies — which together fuel over 90% of the Indian market — are staring at ending the financial year with a combined loss of Rs 69,753 crore, pared down from over Rs 70,500 crore because of the rupee’s near-13% appreciation against the greenback.
So when the ministerial panel on commodity prices under the chairmanship of external affairs minister Pranab Mukherjee meets this Thursday, the main question before it will not be whether fuel prices should be raised — which is almost inevitable — but how much of the burden should be passed on to the consumer. Politically, there cannot be a better time for raising people’s motoring bill: The elections in Gujarat and Himachal Pradesh are over and a general election is still some time away. Besides, crude’s century on Nymex provides the psychological handle needed to ensure smooth political sailing for the decision to raise pump prices. There is a general realisation that the government has run out of time to stave off a fuel price hike.
How bad will it be? The ministerial panel is expected to approve an increase of Rs 2-3 per litre in the price of petrol and Rs 1-2 per litre in diesel. The increase could be on the lower side if accompanied by some reduction in excise duty. The oil ministry is pushing for an increase of Rs 4 a litre on petrol and Rs 2 on diesel. But such a steep increase may not pass political muster. The last time such a hike was announced, political pressure (including from the Congress) forced a rollback. What looks possible is a moderate increase of Rs 2-2.50 on petrol and Rs 1-1.50 on diesel.
An increase appears certain also because of favourable signals from the Left, the main prop of the UPA government. Through all of last fortnight, Deora has been holding parleys to sew up support, highlighting concerns over the failing financial health of national oil marketing companies to bring around coalition partners on the issue. He has explained to CPM’s Sitaram Yechury and CPI’s Gurudas Dasgupta, among other alliance leaders, how these firms will slide into the red if pump prices are not increased.
The numbers are indeed alarming. The mix of crude India buys, which is lower than US rates, touched $94.62/barrel on January 3, the highest so far. This is nearly $23-24 more than the crude price prevailing when petrol and diesel prices were raised on June 6, 2006. The oil marketing companies are losing Rs 8.74 on a litre of petrol, Rs 9.92 on diesel, Rs 20.53 on kerosene and Rs 256.35 on each cooking gas refill.
Under the burden-sharing formula, losses on motor and kitchen fuels are shared by the government that issues bonds to companies, domestic oil producers like ONGC which give discounts, and fuel retailers who absorb some of the losses. The bonds come in handy to dress up the books but firms need hard cash to run operations. The pressure has forced market leader IndianOil Corporation, which bears nearly 60% of the Rs 340-crore daily loss being run up on fuel sales by oil marketing firms, to consider selling gilts to raise Rs 2,000 crore this month to keep refinery fires burning.
The company, which had bailed out the sovereign during the ’90s, suffered a fall in the pecking order of international finance last month when global rating agency Moody’s downgraded its rating. That is expected to make its working capital borrowings, expected to increase to Rs 3,000 crore, even costlier.
The response to Deora’s campaign has been sympathetic, unlike previous occasions when these leaders had opposed any increase in pump prices and sought reduction in duties to stave off a revision. Even Deora, who has been circumspect on the issue earlier, is now more forthcoming. ‘‘How can you expect retail prices of motor fuel to be low when crude prices have increased so much...everyone (read allies) understands this now and are sympathetic,’’ he says.
But raising prices is not enough. Says IndianOil chairman Sarthak Behuria,‘‘We need a lasting solution, not ad hoc responses. The government should free pricing of petrol and diesel from its control and subsidise domestic LPG (cooking gas) and kerosene from the Budget.’’ To make a point to the government, the company last week raised prices of its branded fuels which are outside pricing control.
While constantly rising crude prices are mainly responsible for the situation, the UPA government cannot escape some of the blame. The NDA had dismantled the system whereby government controlled retail prices and made up the oil marketing firms’ losses through a complex accounting method called the Oil Pool Account system. Besides, unlike Deora or his predecessor Mani Shankar Aiyar, NDA’s oil minister Ram Naik did not abrogate the oil ministry’s decision-making role in taking the price revision to the Cabinet. Political consultations were kept apart from the executive’s role.
The result was that oil firms raised prices, though only after Naik’s verbal approval, many times by small amounts and also brought them down slightly when crude showed any signs of cooling off. But this government has again played politics with oil prices, and consumers will now have to pay at least part of the price.
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