Dr Ashwani Mahajan
In the last few days, steep hike in the prices of petrol and diesel is creating doubts about the legitimacy of recently introduced pricing mechanism for these petro products. It is notable that prior to June 2010, prices of petrol, diesel, LPG, Kerosene etc. were all determined and controlled by the Governments. Under this administered prices mechanism, upheavals in the international crude prices were not affecting the prices of these products on day-to-day basis. Further, it is notable that majority of mining, refining and marketing of petro products has been in the hands of public sector giants like ONGC, Indian Oil, Bharat Petroleum etc., though some private companies like Reliance have also entered in this field in the recent years. After June, 2010, Government left the pricing of petrol, diesel etc. on petroleum companies. After decision of the Government to decontrol these prices, prices of these products started changing very frequently. This led to instability in retail petro prices. After, 1st May 2017, Government allowed daily fixation of prices on experimental basis in five cities and the same was extended to the whole country later. It is notable that before this, petrol and diesel prices were announced on 1st and 16th of every month.
Under the new system, in the first month, prices of petrol and diesel declined slightly, however, in later months we find a steep hike in petro prices. Reason, why new pricing mechanism is being questioned is that whereas in May 2014 international price of crude oil was 107 dollars per barrel, price of petrol in Delhi was rupees 71.47 per liter. Now when the price of crude is only 54 dollars per barrel in international market, price of petrol in Delhi passed on still rupees 70.39 per liter. Thus we can say that benefit of low international price of crude oil has not been passed on to the consumers. Question is why despite lower crude prices; such a high price of petrol is being charged. General perception is that by allowing companies to change the price daily, government has given them the right to exploit consumers. People feel that central and state governments and also petroleum companies have been exploiting the consumers.
Government’s Argument
Petroleum Minister, Dharmendra Pradhan believes that new price mechanism is transparent and there is no mistake. According to the minister, present increase in petrol and diesel prices is due to increase in crude prices, which is obviously short lived. He also ruled out any possibility of re-imposition of price control on petro prices. It is true that recently there has been some increase in international crude prices, due to which petroleum companies have hiked prices of petrol and diesel. Therefore, petroleum minister seem to be correct about recent hike in prices.
However, if we make a comparison between the years 2014 and 2017, nobody would be able to legitimise the present hike in prices of petrol and diesel. After May 2014, nation benefitted hugely due to steep fall in crude prices. Government used its prerogative to divide this benefit into three parts. First part was transferred to Governments (both at centre and states); second was granted to petroleum companies and they were allowed to raise their profits and only a small fraction was transferred to consumers by reducing price of petrol and diesel. If we look at central and state governments’ revenue we find that the same became three times between 2013-14 and 2016-17, to 5.24 lakh crores. Profits of 3 petroleum companies, namely Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum; increased by 66 percent in 2015-16 and 160 percent in 2016-17. However if we look at the consumer’s benefit, price of petrol came down from rupees 71.40 (in Delhi) to only rupees 56.61 per liter in March 2016, before they started increasing and ultimately reached rupees 70.4 per liter in September, 2017. Data shows that in May 2014 only 33 percent of petrol price went into taxes and dealer commission, by now it has reached 58 percent. In case of diesel, taxes and dealer commission was 20 percent of its price, it has reached nearly 50 percent now.
Therefore one can conclude that decline in international crude prices has given huge bonanza to the central and state governments and also the petroleum companies, however system has been very miser in passing off the benefit to the consumers. Therefore, wouldn’t it be good if prices of petrol and diesel are not allowed to increase with increase in international crude prices (which of course is short lived) by adjusting hike in crude prices into revenue and profits of petroleum companies.
Government Seemingly Under Companies’ Pressure
It appears that petroleum companies are not ready to reduce their profits in any condition. New mechanism to determine oil prices has given a new weapon in the hands of petroleum companies to exploit consumers. In fact, the new system to determine petrol diesel prices is not in the benefit of consumers, industry and agriculture. Daily changes in price are becoming the cause of instability for the industry, agriculture and the general public. Those who advocate daily changes in petrol diesel prices argue that international crude prices change daily, therefore its legitimate to change prices daily. However, this argument may not hold good for India, as the deals of purchase of oil by large companies are made well in advance and daily changes in oil prices do not affect them. If it is argued that this happens even in America and Europe, it will not hold water, as oil prices there, are decided based on competition and each company decides its own price, while in India It is actually decided by industry cartel. Therefore, these companies can keep prices high at their will. If it is argued that petrol pump dealers were playing games by hoarding, question is why consumers should suffer while petroleum companies try to fix them?
(The author is Associate Professor, PGDAV College, University of Delhi.)
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