Oil on fire: The open-market illusion in statist fetters

Suspicion remains that a proportion of the fuel taxes pays for a bloated political and bureaucratic apparatus.

Prime Minister Narendra Modi needs to be reminded that when he personally made the call for removing the remaining fuel subsidies, at the beginning of his tenure, he made no mention of imposing fresh indirect taxes on fuel. Of course, even in the erstwhile subsidised regime on fuel, the tax collections on sale of fuel far outweighed the outgoings. The impression given by Modi, however, was that he was encouraging the free-market and that Indians would henceforth pay whatever the international prices dictated. Tickers at the pump would be revised daily, or more often, and it would be a twoway street.

But did the Prime Minister think the whole matter through? Because what the public got is its fuel, no longer subsidised and at twice the international prices. This is proven by the rates at which our exports of refined fuel are effected, before the imposition of a plethora of Central and state taxes. The public has been made the victim of a statist confidence trick in which the Finance Ministry raised excise duty nine times in the 50 months of this government, followed by state imposed ad valorem VAT, additional taxes et al.

And the state, on its part, has done absolutely nothing for over a quarter century since liberalisation, when fuel demand began to grow as the stifling controls of the licence-permit raj were dismantled. Nothing at all, to develop a strategy to manage contingencies and unforeseen exigencies of international oil prices. This even though oil is the country’s largest import, at over 80% of its ever expanding requirement. An import that involves an estimated $ 87.7 billion till 31 March 2018, up 25% on the year before, and likely to go up another $30 billion this current fiscal. We are currently the third largest global importer of crude, importing over 220 million MT annually.

The Modi government, which the public was hoping would be a departure from the lackadaisical strategic planning of the past, has unfortunately been a let-down too.

Where was the attempt to create a contingency Oil Import Fund when this government enjoyed two years of low crude prices? Did its think-tanks conclude that international crude prices would henceforth always be low?

For the military, and as a host for other countries, India has begun to stockpile crude in underground reservoirs. But for itself, as an economy, and for the public, it has no strategic vision, apart from attempted sourcing at better prices and bagging oil exploration contracts abroad.

Why are there no biofuel refineries even though bumper sugarcane harvests struggle to find takers and need massive government subsidy and support prices? Other estimates conclude 58% of our vegetables and fruit spoil for lack of modern cold chain facilities and this waste too could also become bio-fuel.

India could meet perhaps 20% of its present needs for crude, if not more, if it had the right policies in place, implementing them with a will.

America has found its own way via high- tech shalecracking, to become crude self sufficient and a net exporter. India, on the other hand, has been left behind by countries like Thailand, which has plenty of bio-fuel availability at its pumps. Union Minister Nitin Gadkari recently promised Indian bio-fuel by that magic year, 2022, India’s 75th as a free country. A date which appears to serve this government’s future wish-list in all matters!

Also consider that when it comes to the over 7% fall in the rupee and counting against the dollar, the Thai baht has fallen only 1.24%, by reducing its linkages with the US dollar.

The government tries to justify holding the line on these rapacious fuel prices by saying the taxes raised are going into infrastructure development etc., without once being either transparent or specific. It also says it has repaid the oil bond borrowings of the UPA to pay for the erstwhile subsidies.

Highly educated apologists of the government try to keep their finger in the dyke by invoking all kinds of macro-economic scaremongering, hinting darkly at a stock market and eco- nomic collapse if the government does not hold the line. The fact is, the stock market has lost over 2% in just two days, obviously unimpressed by the government’s policy actions, and interest rates are likely to go up too.

The suspicion remains that at least a proportion of the fuel taxes goes to pay for a bloated political and bureaucratic apparatus, that has never once, in the 50 odd months of this government, attempted any form of cost-cutting or austerity. Instead, there have been salary and pension enhancements for itself with metronomic regularity, not once but several times- pay commission revisions, MP and MLA emolument revisions, allowance and perquisite revisions and so on.

It is time to hold the Modi government to account for ignoring the wishes of most, if not all of urban India, most affected by unprecedented fuel prices.

The CAD and fiscal defi- cit, the inflationary effect on everything via fuel as a vital input cost, is to be ignored only at this government’s peril. Rating agencies are already downgrading India and foreign capital is fleeing.

To be so obtuse about this matter in an election season, is inexplicable, unless the Modi government is banking heavily on the TINA factor.

But apart from the shocking lack of anticipation, evident in the government’s bumbling responses under attack, this vexed issue of retail fuel pricing has quite a policy history. Diesel in particular, along with its cousin kerosene, was long thought to be a poor man’s fuel, even though heavy transport and trains used diesel too. And so, they were highly subsidised. The limited kerosene in use today continues to be so.

Petrol came next, but in the old swadeshi/socialist days, there were only a restricted number of cars and two-wheelers produced, and waiting lists for new ones ran into years.

Aviation fuel and aircraft parking charges were, and still are, outrageously priced in India. It is still treated as a luxury item that facilitates air travel by the rich.

Gradually, over a decade after liberalisation, people could not only buy freely and “off-the-shelf”, from a wide selection of transport options, but banks eagerly financed them with affordable EMIs.

As cars, motorcycles, scooters, grew in number alongside trucks and buses and expansion of the rail, metro, road, waterways, aviation, port sectors, the subsidies on fuel started to burgeon. Successive governments struggled to finance the fuel subsidies, and increasingly on LPG for the poor, as the gas finds offshore made it available. The LPG direct subsidy to the poor is the largest remaining chunk still operative.

As the predecessor governments started to both raise prices and take subsidies off in minuscule doses, the consuming public was not unduly upset. It started with the more elite petrol and aviation fuel and then expanded gingerly to diesel, kerosene and LPG too.

International crude prices raged high through most of UPA I & II, and prices of fuel in India crept up steadily. But it is only now that the free-floating pricing from the oil marketing companies and not the Petroleum Ministry, plus choke inducing government taxes, have resulted in hefty, daily upward price revisions!

Today, the Central and state governments do oc- casionally tinker with fuel prices by up to Rs 3-4, fearful of public anger, but this is far from adequate to control the Frankenstein monster a lack of foresight has created.

To sacrifice the micro in favour of confusion over macro economics, is an old BJP failing. It resulted in ending the tenure of A.B. Vajpayee, despite his failed “India Shining” re-election campaign in 2004.

And now, seeking approbation from FIIs, WB, IMF, international rating agencies like Moody and Fitch, is seemingly being given priority over working for the relief of the Indian people.

There is, in addition, probably a confused socialism at play. The BJP seems content to ignore the aspirations of the urban masses and classes, even though it forms almost half the electorate, in favour of a mythic solidarity with the rural hinterland. Is this not over confidence gone horribly wrong?

The BJP, says its party president Amit Shah, expects to win handsomely in 2019, and rule for another “50 years”. But how does clubbing an opportunistic Opposition agitation for a cut in fuel prices, with the genuine demand for relief from the hurting, angry masses, help in the re-election endeavour?