Flawed for­mula

The pric­ing mech­a­nism in In­dia, which is based on the in­ter­na­tional price of petrol, is a ma­jor rea­son for the ris­ing fuel prices, along­side the in­crease in the price of crude oil and the fall­ing ru­pee.

FrontLine - - COVER STORY - BY

THE RIS­ING RE­TAIL PRICES OF PETROL AND diesel ought to worry the Bharatiya Janata Party (Bjp)led Na­tional Demo­cratic Al­liance (NDA) gov­ern­ment at the Cen­tre as they can well be­come a po­lit­i­cal is­sue in an elec­tion year. The cur­rent prices, the high­est in re­cent times, have had a cas­cad­ing ef­fect on food prod­ucts, with con­sumers pay­ing as­tro­nom­i­cal amounts for daily con­sum­ables such as veg­eta­bles. The high prices are also ex­pected to in­flate In­dia’s cur­rent ac­count deficit. With crude oil touch­ing $80 a bar­rel in the global mar­ket, do­mes­tic oil prices of petrol and pe­tro­leum prod­ucts have reached un­af­ford­able lev­els. In sev­eral cities, the re­tail price of petrol is well over Rs.80; for in­stance, in Mum­bai it was as high as Rs.89.69 on Septem­ber 22. The fall in crude oil pro­duc­tion and the sanc­tions im­posed by the United States on Ira­nian im­ports are among fac­tors caus­ing the rise in oil prices, though there is rea­son to be­lieve that the In­dian pric­ing mech­a­nism it­self is re­spon­si­ble for the high fuel prices in the coun­try.

Some State gov­ern­ments have at­tempted to re­duce taxes to bring con­sumers some relief, but it has not been enough. Ta­pan Sen, gen­eral sec­re­tary of the Cen­tre of In­dian Trade Unions (CITU), ex­plained to Front­line that as far as global crude oil pro­duc­tion was con­cerned it was a con­scious de­ci­sion to pro­duce or not to pro­duce. If prices tended to col­lapse, oil pro­duc­tion would au­to­mat­i­cally be re­duced. This en­sured the main­te­nance of a de­mand-sup­ply equi­lib­rium. In the In­dian con­text, it was clear that the day-to-day ad­just­ment of fuel prices was done not only be­cause of the volatil­ity of in­ter­na­tional prices and pro­duc­tion. Since 2013, a down­ward trend in fuel prices had been ob­served, but the ben­e­fit, Sen said, was never passed on to the peo­ple. It was neu­tralised by a higher in­ci­dence of tax­a­tion, at both the Cen­tral and State lev­els.

In­di­rect tax­a­tion is one of the sin­gle big­gest sources of rev­enue for both the Cen­tral and State gov­ern­ments, with the tax on fuel rep­re­sent­ing around 50 per cent of the in­di­rect tax rev­enue for both. The State and Cen­tral gov­ern­ments’ de­pen­dence on this was re­spon­si­ble for the high fuel rates, said Sen. When the fuel prices were fall­ing, the peo­ple could have got relief , but this did not hap­pen.

The ba­sis of pric­ing of fuel was an­other fac­tor. Ear­lier


it was a cost-based pric­ing sys­tem on the ba­sis of which an ad­min­is­tered pric­ing mech­a­nism (APM) was in place.

Sen told Front­line that in re­sponse to a ques­tion in Par­lia­ment re­gard­ing the ba­sis of the ad­min­is­tered price for diesel, as it was at a higher level, the gov­ern­ment had said that the cost was high as there was a ma­jor de­pen­dence on im­ports and that the ba­sis for cal­cu­lat­ing the ad­min­is­tered price was the to­tal of im­port cost of crude plus re­fin­ing costs plus trans­porta­tion costs plus a rea­son­able re­turn. But the en­tire pric­ing regime was changed from that mech­a­nism. Hence­forth, pe­tro­leum pric­ing was to be in line with the price of petrol in the in­ter­na­tional mar­ket. “We were not im­port­ing petrol but crude. So why should our pric­ing be de­ter­mined by the price of petrol in the in­ter­na­tional mar­ket? We said, add your re­fin­ing costs plus trans­port costs and ar­rive at a ba­sic

A PROTEST by the Janata Dal (Sec­u­lar) in Ben­galuru dur­ing the Bharath Bandh on Septem­ber 10 against the Union gov­ern­ment for in­creas­ing fuel prices.

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