New Delhi,The Central Government has failed to calculate the economic, as well as, political costs of the steep increase in the petroleum product and LPG prices and has reacted to the situation in panic and extremely shortsighted manner. It does not seem to have a long-term strategy to deal with the continuing crisis and merely blames the opposition parties for taking advantage of the situation arising from the public outcry against the price hike, in the run up to the Lok Sabha elections, which are not far away. After suffering a string of reverses in the State Assembly elections, it ought to have been doubly cautions about calculating the likely impact of its policies on the voters and ensured that price rise, to the extent unavoidable, was shared equitably between the poor and the rich who have a greater capacity to pay higher prices for petro products.

There is substance in the argument that it is better to have a moderate degree of inflation along with continued economic growth than drastically reduce consumption and imports and face recession, which would cause great damage to the growth process. But the point is that, in the name of liberalization, the Government should not allow public and private entities involved in production, refining and marketing of oil and its products to make extravagant profits and put the entire burden on the poor and the middle classes, which have limited capacity to do so. Ever since Independence, the people have demonstrated that they are willing to undergo sacrifices in the national interest, but they resent being made to suffer alone, while the business class continues to reap unprecedented profits. Interestingly, most of these entities hardly pay any taxes on their windfall profits, having succeeded in extracting concessions from the government to forego taxes and make merry.

The main justification for the petroleum product price increase given by the Government is that the oil producing, refining and marketing companies, which were forced to sell at heavily subsidized prices, would have otherwise gone bankrupt. But, the facts speak otherwise. The country's consumption of crude oil last year was 147 million tonnes, of which 34 million tonnes was produced domestically. After the recent hike, in the retail price of Rs. 50.52 a liter, the actual price (Rs. 27.96) still accounts for just 55.3 per cent of the price paid, excise duty (Rs. 13.45) or 26.6 per cent and State-level sales tax, dealer's commission and delivery charges for the balance 18.1 per cent. The relevant proportions in the case of diesel (price Rs. 34.76) were 77.5. 10.4 and 12.1 per cent respectively.

Coming to the performance of the oil companies, between April and December 2007, Indian Oil Corporation revenues increased 52 per cent over the previous year. In the October-December 2007 quarter the company's net profit increased by almost 17 per cent over the corresponding period of the previous year. Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd showed almost similar revenue increases last year, indication that the industry is not in distress. According to the annual report of Reliance Industries Limited, its profit from the refining business had increased from Rs. 5,915 crore in 2005-2006 to Rs. 10,372 crore in 2007-2008. The company did not pay any tax on these profits. The Left parties have suggested a windfall profit tax of 20 per cent on such profits from refining and oil and gas exploration. That would help mobilize at least Rs. 2,000 crore.

The Opposition parties further allege that in 2007-2008 alone the Government had written off taxes and duties to give benefit to the corporate sector, especially big-time players. There were exemptions to the tune of Rs. 206,700 crore and Rs. 235,200 crore in 2004-05 and 2005-06 respectively. The figure has averaged Rs. 250,000 crore a year and has increased in real terms. The 2008-09 Budget revealed that the Government wrote off taxes and duties to benefit principally the big industrial houses. This includes Rs. 148,000 crores in customs duty exemptions, Rs. 58,655 in corporate tax concessions, Rs. 58,000 crore in excise duty concessions and over Rs. 38,000 crore in individual income tax exemptions.

They also point out that the losses of the Oil Marketing Companies were notional figures and not actual. As the crude oil prices are continuing to rise, the Government's response should have been to restructure duties on petro products and introducing a transparent pricing policy to ensure that the OMCs and the refineries made reasonable profits commensurate with investment, but not excessive gains at the cost of the National Exchequer. Another argument is that the public sector oil marketing companies would make an additional Rs. 21,129 crores as a result of the price increases. But this amount would have been mobilized also through creation of a Price Stabilization Fund from the Rs. 7,500 crores raised from the OIL and Natural Gas Corporation and Oil India Limited annually by way of cess. Excise duty on petrol could have been cut by another Rs. 3 a liter, instead of Rs. 1, which would give a relief of Rs. 12,000 crore to these companies.

It is also pointed out that the Government should consider phasing out 15 per cent of the corporate and excise duty exemptions given during 2007-08, which are estimated at Rs. 58,655 crore and Rs. 87,992 crore respectively. Among the several options before it, the Government chose raising retail prices and reducing customs and excise duties marginally and transferred the benefit to the oil marketing companies. Some other alternatives were not considered but cannot be ignored altogether. One is to tax the super profits of oil companies involved in production and export of crude and products at the current level of prices so as to compensate the marketing companies. The other, and more simpler one, is to impose a cess on income tax payable by supper-rich individuals and profit-making corporate entities to pay for the subsidies that protect the ordinary consumer from the effects of the global prices rise. The seven-year tax holiday given by the government to oil exploring and producing companies has helped them make super profits out of tune with their investment. When the Government is thinking of bringing these companies also within the tax net surprisingly, the Petroleum Minister has protested against it. Companies extracting oil on a production sharing basis are making a gain of 80/bbl in the name of import parity without any link with actual production cost.

The Government would be fully justified in raising a little more tax from individuals, businessmen and companies who have derived huge monetary gains from the high economic growth of recent years. It must be noted that despite the recent price increases, the cost of petroleum products in rich countries like US and Europe is still lower than in India. This explains that unbridled liberalization meant only to enrich the business class, while the living standard of the ordinary person continues to dive, will have serious consequences for the economy. This is one aspect which the armchair economists, who have no link with the people and do not feel their pulse and get elected through the Rajya Sabha, seem to deliberately ignore. Through their unimaginative policies and inept handling of the economic situation, they seem to ensure that the present government becomes so unpopular that it has no chance to return to power in next year's election.

There is merit in Mr. P. Chidambaram's argument before the OPEC that oil speculators are playing havoc with the market. Between 2007 and now the global oil prices have doubled, while OPEC itself is forecasting demand growth of under 1.3 per cent. Though Saudi Arabia has agreed to marginally increase oil production, other OPEC members, whose main income derives from this commodity, have refused. It is only when oil consumption falls that they might feel obliged to reduce the prices. But that does not look like happening. While there is need to curb speculators in oil internationally with consumers, rich and poor, joining hands to eliminate, or at least, discipline them, individual countries are left to take recourse to their own devices to protect their interests. The speculators are driving up markets even though producing countries do not gain as much, while vulnerable oil consumers are made to suffer.

The oil price hike has added only about 1.5 per cent to the already high level of inflation, but the Government pleads helplessness in tackling the situation. It could make savings in the enormous expenditure incurred on many yojanas, the benefits of which do not reach the people in order to protect the consumer. The recent Assembly election results have showed that voters have not benefited. The Government gives the impression of being disunited and rudderless and incapable of managing such a serious situation.

Source - NPA

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