October 26, 2014

Diesel Price Deregulation, Hike in Natural Gas Price

Tapan Sen

ON October 17, the Modi government has announced its decision of total deregulation of diesel price, besides declaring an increase in the price of natural gas with a provision of revising it every six months. The entire media reported the decision and the move with a warm welcome. The entire big business lobby also loudly welcomed the move. But what does this move of complete deregulation of diesel price mean to common people, particularly when diesel is the most crucial component of fuel of unavoidable necessity for every-day life, which is having direct impact on the prices of every other essential commodity and an essential input for agriculture also? The impact of such action is being sought to be projected as beneficial to people citing the reduction in diesel price in the country following the decline in price of crude oil in the international market to US$ 83 per barrel. This deduction in diesel price was overdue, at least three months back particularly when the price of crude in international market sharply declined. Minimum sense of honesty in governance warrants such reduction since as a partial deregulatory measure, the Oil Marketing Companies were allowed to increase diesel price by 50 paisa every month since last January. Now such reduction in diesel price is dubiously packaged with the decision of total deregulation of diesel price in order to cheat the people. Such projection and exercise is absolutely wrong and unscrupulous in character. In reality, the deregulation means total abdication of responsibility by the government to control and regulate the price of the most essential and crucial item of fuel which has impacts on prices of every other essential commodities. Diesel is the unavoidably essential fuel for public transport and goods transport including Railways and also is an essential input for agriculture. Therefore, its price should not be allowed to increase recklessly and the government must play a definite role in keeping the price of diesel under control through appropriate intervention in the greater interests of the people and the national economy. Complete deregulation of diesel price means complete withdrawal of government intervention in controlling the price of this most essential fuel and leaving the price to be determined by the concerned oil marketing companies, both in public and private sector. And this is more so particularly when the pricing mechanism of petroleum product as decided by the government reflects gross perversion. Petroleum products produced/processed/refined domestically are being priced in line with the prices of those products prevailing in the international market having no linkage and relevance with the production costs or refining or processing cost at home. This is called import parity pricing introduced during the previous NDA regime in 2002 dismantling the administered pricing mechanism which allowed a cost plus reasonable profit based pricing. Yes, the import parity pricing mechanism is the real villain which was designed to stretch the pricing mechanism of essential fuel to the level of ensuring profit to unreasonable level particularly for the benefit of private players in the petroleum sector including foreign companies. Public sector companies also got the benefit partially since the PSUs are made to cater to the domestic market at a price partially moderated by the government on the import-parity prices. Private petroleum companies used to export their almost entire product thereby making windfall profit by selling petroleum products refined and processed in Indian soil abroad taking advantage of the volatility of prices in the international market. The decision of complete deregulation of diesel price in the country is packaged with a reduction of diesel price at the moment following decline of crude price in the international market to around 83 dollar per barrel. But this is not a permanent phenomenon. Given the character of continuing volatility of crude price in the international market as revealed at least during last one decade, frequency of rise in crude price is much more than its occasional drop. During the period 2004-2014 the crude price in international market jumped from around 32 dollar per barrel to a peak of 130 dollar and now it is at the level of 83 dollar, still reflecting a rise by almost three times since 2003-04. Therefore, total deregulation of domestic diesel price in the background of import parity pricing mechanism will lead to consistent rise in diesel price to be more frequent than occasional drop. This is going to create a recurring inflationary pressure on all commodity prices. One can have an idea of impact of deregulation from the experience of movement of petrol prices in the domestic market since it was deregulated by the government from 26th June 2010 in compliance with the recommendation of the Kirit Parikh Committee. Immediate impact of such deregulation had been a Rs 3.50 increase per litre to Rs 51.53 on 26-06-2010 (at Delhi). And thereafter it increased consistently with an occasional marginal decline during the interim period to reach a peak of Rs 73.18 in May 2012 and again continued to hover around Rs 70 to Rs 74 during mid 2013 till April 2014. As on April 2014, petrol was priced at Rs 72.26 per litre at Delhi -- a 50.76 per cent increase in four years compared to pre-deregulation price in April 2010. For diesel price after full deregulation, situation cannot be different. Already, even before deregulation, the diesel price at Delhi witnessed a 45.61 per cent jump in last four years from April 2010 (Rs 38.10 per litre) to March 2014 (Rs 55.48 per litre). Post deregulation, diesel price movement is going to be much more virulent, given the inbuilt volatility in the international market, oil being the centre-point of global hegemonic drive of the imperialist forces. The present reduction in diesel price is but a temporary solace packaged along with the decision for deregulation of diesel price with a dubious intent. One needs to go into the pervert intent behind the import parity pricing mechanism of petroleum product. The NDA government had dismantled the administered pricing mechanism for petroleum product and introduced the import parity pricing. In fact, with the deregulation of prices of diesel, the circle of reform in petroleum product pricing stands completed. During the intervening period since 2002, including the UPA regime, the government made several attempts to make such deregulation but could not succeed fully owing to opposition by the Left and also others. The protagonists of such pervert ideas in the governance and the corporate lobby argue that since India has to depend on import of crude oil to meet 80 per cent of the country’s necessities, what is wrong in adopting import parity pricing of petroleum products. The basic truth which is sought to be camouflaged by them is that the petroleum product produced/processed/refined in Indian refineries are being priced in line with the price of those finished products prevailing in international market. In our country, we do not import finished product but mainly crude oil and process that in our refineries which are having capacity to meet the entire domestic demand of petrol/diesel/kerosene and also export substantially. And the most rational and scientific modality of pricing should have been the cost plus approach which should comprise the cost of imported crude including insurance/transportation etc plus the refinery cost at home. Instead of doing that, pricing of petroleum product refined and processed in domestic refineries is being done on import parity basis – i.e, the price of those products prevailing in international market plus freight, insurance, local transportation to refinery gate etc will finally make the refinery gate price (basic price) which along with tax added will become the retail selling price to be charged for the consumers. Hence pricing of petro products including diesel in the domestic market has no linkage with the cost of refining at home which is always much lower than the refining cost in the western economies, Latin America and Japan. Therefore, with the total deregulation of diesel price (deregulation of petrol prices was already done in 2010), the benefit of lower cost at home will be totally appropriated by the oil companies and will not reach the people and they will continue to be charged much higher price for the petroleum products than they should have been. A simple calculation can make the things clear. At 83 dollar per barrel (160 litre) import price of crude, the price of crude per litre works out to be Rs 31.58 (at Rs 60.88 per dollar exchange rate) and adding the refining cost at Rs 1 per litre and Rs 1.50 per litre insurance, transportation and other charges on the average to it, petrol price at refinery gate works out to be Rs 34.08 per litre and along with tax, the retail sales price works out to be Rs 50.40 for petrol. But now as on 15th October 2014, the petrol price is being charged at Rs 66.65 at Delhi - an estimated overpricing of petrol by around Rs 15 plus per litre. The refining cost and other costs are estimated on average. Actual figures per litre may marginally increase or decrease the actual extent of overpricing but sizable amount of overpricing will be there. In case of diesel also similar overpricing is taking place under import parity system, which after complete deregulation will be fully passed over to common people as consumers. Should the people of the country tolerate such overpricing of petroleum product engineered on them by the government-corporate nexus? Another important factor in high domestic price of petrol and diesel is high rate of taxes (both Centre and states together) on petroleum products. The each rupee of petrol price has a component of almost 48 paisa whereas each rupee of diesel bears a burden of around 28 paisa as tax. Lot of noise is being made on the so-called under-recoveries faced by the public sector petroleum companies allegedly caused by the regulated pricing of petroleum products in the country. And this noise is being deliberately made to justify deregulation of petroleum pricing. But is under-recovery a loss to the oil companies. Despite partial regulated pricing regime prevalent till 2010, all the oil companies are consistently making profits. The under-recovery is actually the difference between the import parity price of petroleum products and the actual price being charged on the people after moderated by the government, which is nothing but a notional figure. For petroleum such moderation ended in June 2010 and for diesel, it also now ends following deregulation of diesel pricing. It only now remains operative for kerosene and LPG till the government of the day will deregulate them in the days to come. But even prior to 2010, petroleum companies continued to earn comfortable profit despite bearing the burden of government’s moderation of petroleum prices and after deregulation of petrol and diesel prices such profit will go up further. Hence noise of under recovery is nothing but a dubious ploy to confuse the people through mis-information campaign. In totality deregulation of diesel price is destined to impose higher burden on the people through uncontrolled increase in diesel price owing to its direct alignment with volatile price situation in international market through import-parity pricing system. In fact the government can be and should be put on dock owing to at least two counts. A democratically elected government must not allow the price of basic fuel which is the life-line of the economy having direct impact on all essential commodities to go uncontrolled and deregulated. Secondly, adoption of import parity pricing of petroleum products instead of cost plus pricing is a crime on people burdening them through gross overpricing of petroleum products. This fraud on people by successive governments at the Centre and the present BJP regime in particular should be thoroughly exposed. So far as the government announcement on gas pricing is concerned, definitely the BJP dispensation did not yet accept the Rangarajan Committee prescription of doubling the gas price. It has been increased marginally to 5.61 dollar from existing 4.2. But provisions for premium for gas explored from deep-sea fields may push it up further to around 6.5 dollar or so. The provision for revision of price every six months as reported by the press appear to keep the matter more in sleeves than revealed by the government announcement and the matter need to be studied further. But for gas price also, the same villain of pricing system based on average of prices ruling in international hubs, without any reference to the domestic cost of production of gas has already placed the gas price in an artificially higher plateau and every increase in gas price (under such international average system) means a windfall gain to gas producers and increasing burden on the people. It should be remembered that same Reliance Industries Ltd offered to supply NTPC 12 units of gas per day at 2.34 dollar per unit for a period of 17 years for NTPC’s Kawas and Gandher project in an international competitive bidding process. That price of 2.34 dollar per unit must be RIL’s cost plus price offer ensuring respectable profit. But almost around the same time, it appears, after managing those in corridors of power in the government, RIL backed out from their offer almost at the final stage of concluding the contract and placed a demand before the then government for a price of 4.3 dollar per unit and the government readily obliged RIL by agreeing to 4.2 dollar per unit. This exposes the extent of overpricing of domestically produced natural gas allowed by the previous government at the Centre. Present rise in natural gas price is built up on previous over-priced level which must be comprehensively understood. Need of the hour, therefore, is to thoroughly audit the actual cost of production including exploration of the natural gas in both public and private sector entities by CAG and decide price on cost plus reasonable return basis. The country is having huge natural gas reserves and it being a national asset, as reiterated by Supreme Court, its exploration and production must be under scrutiny by the constitutional authority to harness this crucial input for the country’s development by putting in place a proper and rational cost-based pricing regime. Natural gas is the only viable feed stock for fertiliser and power production in the country at present which must be taken serious note of. The cash transfer system in case of delivery of subsidised LPG, at its present stage, will also lead to exclusion of substantial section of the entitled and eligible poor from the benefits of LPG subsidy since a substantial section of common people in our country is still not having access to banking services despite the launching and operation of the much touted “Jan-Dhan Yojana”. The government must ensure universal coverage of all households.