Diesel price hike, Inflation and the Advertisement lie of Govt

The weak kneed Government has suddenly started enforcing some harsh decisions ! – P Chidambaram seeks to justify everything and calls all oppositions betrayers..  If Petrol Companies have been running huge losses and if Govt had been heavily subsidizing  Petrol, diesel and LPG- the primary Q is why have these Corporations been spending extravagantly, paying bonuses, making huge advertisements and more.  If it is simply retailing, i.e., buying barrels in International market and selling them in retail, does it need any brain or industry at all – simple, the buying cost + expenses + administrative costs + % of profit = selling price.  Why should Oil Companies be part of Navrathnas, hailed about their performance and be run by Govt.   Is it that somebody else is eating the larger share of the cake – why would IOC / BP / HPC – all require marketing, why do they incur costs on this count and where is the need for Agencies in running the petrol bunks, some so glitzy – should not the Govt. directly sell petrol, diesel and LPG ?

Reeling from the Coalgate fire, the UPA government bit the bullet on a politically sensitive issue by hiking the price of diesel by Rs five and putting a cap of six subsidised LPG cylinders per family per year- and they call this a move to minimise the losses suffered by the government-owned public sector oil companies and make the country’s financial balance sheet look better.   

Diesel Price at Chennai		Petrol  price  at Chennai
date	rate	date	rate
14/09/2012	49.98	1/8/2012	72.19
1/8/2012	44.76	24/07/2012	73.16
25/07/2012	43.83	29/06/2012	72.27
1/7/2011	43.95	3/6/2012	75.40
25/06/2011	43.80	24/05/2012	77.53
2/11/2010	40.16	1/12/2011	69.55

Diesel prices have gone up – petrol has been steadily increasing ; there was a time when the price rise would come along only with budget, but in the recent years, every alternate month, you have a hike in petrol – why is this diesel hike, become such political drama…………………  for this sure would affect aamadmi ‘the common man’.  With diesel being the sole fuel used for transportation of commodities as well as passengers, consumers are bound to feel the pinch.  Soon you will have the price of brinjals in local market selling high, auto rickshaw fleecing you more and the cost of transportation going up.  TMC has walked out – some other partners have other personal compulsions, in trying to be soft with any hike. 

What is more, the Govt. is spending heavily in the form of advertisements seeking to justify the price hike.   The  Ad campaign tries to  list out the reasons that compelled the government to take these unpopular measures. It  talks of the increasing crude oil price  and international product price and the sharp rupee depreciation against the US dollar as also the poor financial health of oil marketing companies (OMCs)— IndianOil, Bharat Petroleum and Hindustan Petroleum— will also be highlighted.

Read this article in First Post, which is worth reading and circulating.  [R. Jagannathan - http://www.firstpost.com/business/the-rs-16653-cr-lie-at-the-heart-of-govts-diesel-price-justification-457921.html]

A small lie is at the heart of the government’s public justification for the recent hike in the prices of diesel and the decision to restrict subsidised cooking gas (LPG) supplies to six per family per year.  In advertisements released to the print media today, the ministry of petroleum and natural gas says the government collected Rs 83,700 crore in taxes on petroleum products and paid out Rs 1,38,500 crore as subsidy compensation to oil marketing companies (OMCs) such as Indian Oil, Hindustan Petroleum, and Bharat Petroleum.

Since the burden of the opposition criticism is that taxes could have been lowered to reduce the impact of the price hikes, the ad has this tearful reality to present: “The government of India was, therefore, a net loser by Rs 54,800 crore.” This figure is arrived by subtracting the duties collected from the subsidies paid (Rs 1,38,500 crore – Rs 83,700 crore = Rs 54,800 crore).

The lie at the heart of this statement is this: the government did not actually send any cheque for Rs 1,38,500 crore to the OMCs to compensate them for their “under-recoveries”.  What actually happened was that it paid Rs 83,500 crore and asked the upstream oil and gas producers – Oil and Natural Gas Corporation, Oil India Ltd and gas marketing company GAIL – to pick up the balance losses of around Rs 55,000 crore.

The government robbed Peter to pay Paul.  The break-up of subsidy payments went something like this: ONGC paid the OMCs around Rs 44,500 crore, GAIL Rs 3,200 crore and Oil India around Rs 7,400 crore approximately. If you are a purist, you might argue that since ONGC, GAIL and Oil India are government companies, there is nothing wrong in including their share of the subsidy burden in the government’s total. But if you are really a stickler for accuracy, let’s be clear: all three are listed companies and not owned fully by the government of India.

ONGC has private (i.e. non-government) shareholdings of 30.77 percent, GAIL has 42.66 percent and Oil India, now due for further disinvestment, of 21.57 percent. If we were to apportion the subsidies paid in proportion to their private shareholdings, you will find that non-government private institutions and retail investors bailed out the government to the tune of Rs 16,653 crore.

The small lie is thus a big lie – of the amount it said it paid as subsidies (Rs 1,38,500 crore) , Rs 16,653 crore is a false claim, even assuming you grant government the right to rob the ONGCs of the world. It is also worth pointing out another number: the duties collected are almost equal to the subsidies directly paid by the government (Rs 83,700 crore versus Rs 83,500 crore). In short, in 2011-12, the government did not pay one paisa in net subsidies out of its own pocket to the OMCs.

Instead, it arm-twisted the upstream oil companies to pay its bills and thus ruined their profitability – including minority shareholders – in what can only be called an appalling breach of corporate governance standards. This does not mean the oil price hike was not justified. At Firstpost, we have always argued that oil subsidies are simply unaffordable, and there is anyway no case for endlessly underpricing fossil fuels and encouraging their misuse (purchase of diesel cars, use of fuel-inefficient trucks and buses) to add to global warming.

Pricing fossil fuels on the basis of true costs, levying a carbon tax on them, and encouraging renewable sources of energy are the way to go. Thus, while the government is justified in raising fuel prices, it has damaged its own credibility with citizens by starting the process with a little lie that has turned out to be not so little: Rs 16,653 crore lie.

On a different plane, though the Bharatiya Janata Party (BJP) at the national level participated in the Bharat bandh on Thursday in protest against the Union government for increasing diesel prices, the BJP government in the State is poised to silently enjoy a windfall from this hike, about Rs. 250 crore this fiscal.  This additional and unexpected revenue is through State’s sales tax, surcharge and entry tax components, which come to about Rs. 1.13 on Rs. 5 increase in the base price of diesel, according to sources in the public sector oil marketing companies.

With about 1.36 crore litres of diesel being sold every day in Karnataka, additional Rs. 1.13 per litre is expected to bring about Rs. 1.5 crore more revenue to the government every day. About 480 crore litres of diesel was sold during 2011-12 in the State and the sales are likely to touch 500 crore litres this fiscal. The Karnataka government levies 16.75 per cent sales tax, 5 per cent surcharge and 5 per cent entry tax on diesel price.

With regards – S. Sampathkumar

acknowledgement of news source  : www.firstpost.com.