price hike.docx

8/10/2019 price hike.docx

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The following article analyses the real reasons behind the recent petrol price hike by over Rs. 7.54in India which was the largest ever seen in recent memories. The hike, while only benefiting theoil companies and shareholders, was met with shock across most parts of India that saw protestseverywhere and also a Bandh on 31st May that saw many parts of the country shut down. While theopposition parties may have scored a few brownie points against the ruling Congress party, but therole of the BJP during its reign at the Centre (1998-2004) that saw changes in the way petroleum

based products are priced is also a causative factor for the increase in fuel prices today, whichcannot be ignored. Nor can one ignore the role of the state governments in not containing the fuel

price.

Hoax of Petrol subsidyReasons being cited by the government and OMCs (Oil Marketing Companies) for hiking petrol pricesare huge losses incurred by these companies on account of selling petrol, diesel at lower prices,huge stress on import of crude oil following depreciation of rupee and worsening fiscal and currentaccount deficit caused by government heavily subsidising these products. Armed with thesearguments the hike in fuel prices is claimed as inevitable and unavoidable. A close scrutiny of theseclaims however shows a different picture.First of all very statement of petrol being subsidised in itself is a big lie. Is the cost of production ofa litre of petrol really higher than its selling price? Below calculations reveal its production cost is

merely Rs. 40.6 (on average). Now when price of crude oil in international market has come downfrom $107 in March to $90 today, cost of a litre works out to be merely Rs. 38.4, less than half ofits selling price.

Processing crude oil->Crude Oil -> Refining -> Petrol -> Refining margin, Transportation, vendor commission = Production

cost of Petrol(1 barrel of crude oil yields 150 litre of petrol)Average value of dollar this year (Jan to May) = Rs. 53.34Average price of crude oil barrel this year = $101.46Refining, margin, transportation, commission per barrel = Rs. 672 (approx $12)*150 litre of petrol = 101.46 53.34 + 672 = Rs. 6084 i.e. 1 litre of petrol = 6084 / 150 = Rs. 40.6 The cost depends on factors like quality of crude oil, refinery. However changes in it would not greatly

affect product price.Thus there is absolutely no subsidy on petrol either by government or OMCs. In fact exchequer mopsup revenue worth billions from various taxes levied on petroleum products. Last year itscontribution to tax revenue was as much as Rs. 1350 billion.Another reason cited much more often is the heavy losses incurred by OMCs. On 24th May, a dayfollowing fuel price hike OMCs like BPCL declared its annual results soon followed by IOC on 28thMay and HPCL just a day after. Forget losses, these companies are among the highest profit makingcompanies in the country. Their FY12 (Jan to March 2012) Q4 profits have in fact tripled orquadrupled from last year.

Company Q4 2011 Q4 2012 Profit growth

IOC 3905 12,670 224%

BPCL 935 3962 324%HPCL 1123 4630 312%

*Figures in crore rupeesDepreciation of rupee and alleged strain on the cost is another flimsy claim. After reaching its peakat $114 in August 2008, prices of crude oil have been going down. Especially in last one month theyhave fallen from $104.93 (on 27th April) to $90.86 (on 25th May last week). It has offset any costimpact caused by depreciation of rupee.How come big figures of losses incurred by OMCs are being touted? Thats the crux of the matter.India import crude oil and not petrol. Latter is fully refined in the country in refineries owned bypublic sector OMCs while that of private OMCs is exported. However following policy change in 2002companies baseline their prices not on production cost but on import parity. Fictitiously assumingpetrol has been imported (at Singapore market rate MOPS95) and then fictitious duties, insurance

and freight is levied on it. The difference between import parity price thus (fictitiously)


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determined and actual selling cost is termed as under-recovery. For eg., if import parity price is Rs.90 and a liter is sold at Rs. 80 then Rs. 10 is the under-recovery!What about Working Peoples under-recoveries?If this is model that is being followed for petroleum based products exclusively, then why notuniversalise it for all other commodities? For example this year the price of cotton in internationalmarket has been around $1 per lb making it Rs. 12,000 per quintal. But the Indian peasants are

being paid a miserable Rs. 3000 (that at times doesnt even cover production cost). Followingimport parity pricing model here and without even levying fictitious duties, freight, insurance etc.,the under-recovery turns out to be Rs. 9000 per quintal. Is government contemplating oncompensating the Indian peasants for this? While its heart bleeds at under-recoveries of profitmaking companies, there is not even a drop of tear shed on the deaths of hundreds of thousands ofpeasants in rural India.And what about the under recoveries of the Indian workers? If they want to match fuel prices tointernational level, why not also match their minimum wages to that level? In Britain, for eg.,minimum wage per hour is 6.19 GBP, which is low for that country (with petrol at 1.25 GBP perliter, one can buy 5 liter in an hours wage). With an 8 hour working day and 22 working days amonth, monthly wages turns out to be 1089 GBP translating into Rs. 92,602 (with 1GBP = Rs. 85 ).Even if one assumes minimum wage in India at Rs. 7000 (in reality its much lesser), there is anunder-recovery of Rs. 85,000 per head!

Real Culprits

Thus in reality, the Indian working people are already being made to pay much higher than theactual cost of petrol. With production cost of Rs. 40, OMCs are making astronomical profits andthey are crying hoarse over fictitious notions of under-recovery. It is a daylight robbery on thenation as a whole and all of its working masses (akin to East India Company). Who are the realculprits? Government and OMCs are only part of the answer.One needs to dive deeper to find out the real culprits behind this crime. First of all what are OMCs?Understanding their nature and changes to their structure in the past 2 decades holds the key tothe issue at hand. Though IOC (Indian Oil Corporation), BPCL (Bharat Petroleum Ltd) and HPCL(Hindustan Petroleum Limited) are government enterprises, they are indeed companies listed onstock markets and a cursory glance at its share holding pattern is an eye opener.

Company Govt Private

IOC 78.92% 21.08%

HPCL 51.11% 48.89%

BPCL 54.93% 45.07%

ONGC 69.23% 30.77%

GAIL 57.34% 42.66%

Oil India 78.43% 21.57%

With the advent of capitalist globalisation, meant that Indian economy embraced neo-liberalreforms in 1991 . Under capitalism, the sole objective of any productive process is solely profit.This profit is distributed amongst its shareholders. Higher the profit, higher are the returns in theform of dividend. In accordance with this, the OMCs were part-privatised through disinvestment.With privatisation, these companies openly embraced the naked principle of profitability. Tofacilitate this, in 2002, Administrative Price Mechanism was replaced with Import Parity Pricing.Even though government is still the major stakeholder, private investment mandates its functioningindependent of any government control. This is the precondition for the investment of private
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capital into any enterprise. Keeping this mind, the government only wants to further disinvest itsstake. All talk of consultations of company executives with the government before any proposedprice hike is just to keep reaction in check.Significant portion of the profits earned by OMCs is distributed to these private investors. Itincludes mutual funds, insurance companies, domestic and foreign institutional investors and alsoother government companies that have cross-invested into each other. Last week declaring its

annual results BPCL announced 1:1 bonus share to its investors and a dividend of Rs. 11 per share.The company has 12,49,88,043 shares held by private investors implying total dividend paid to themat Rs. 1 billion 38 crore. Below table shows dividend paid by PSU Oil companies in 2009-10 andshare of private investors in it.

Company IOC ONGC GAIL Oil India

Dividend 31.81 bn 70.58 bn 9.51 bn 8.18 bn

Private Investors 6.71 bn 21.72 bn 4.06 bn 1.76 bn

*Figures in billion rupeesMatching fuel prices to global level translates into soaring profits to the private investors. Thatsthe real game. It must be noted here that ONGC is the highest dividend paying company (higherthan Reliance) in the country and 30.77% of it is awarded to private investors.

Now this is just the first part of the story; second part is even more scandalous. One can seemonopoly of public sector OMCs (IOC, HPCL, BPCL) in petrol, diesel retail market. Private sectorgiants like Reliance, Essar (domestic) or BP, Shell (global) have an insignificant presence. Now it isworth pondering upon how come such a profitable sector as oil marketing is not monopolised byprivate entities while everything from Education to Health service is? As prices of fuel in India arelower than global level, these companies do not venture into the domestic market. However Indiaspetroleum retail market is obviously too big to ignore. In fact these companies desperately wantthe market to be opened up and matching of prices to global level is the prerequisite so that theydont have to compromise on their profits. It provides an investment opportunity worth hundreds ofbillions and corresponding profits.As illustrated above, it is vested interests of private investors or private capital that is at the rootcause for the hike. It is essentially these interests that unleashed treacherous and the scandalouspropaganda calling for complete deregulation of petrol and diesel prices. An army of sundry

pundits, economists and journalists on the payrolls of these corporate giants has been deployedboth nationally and internationally towards this end. The Economist, Finance Times, Wall StreetJournal along with their juniors in Indian media launched venomous attack calling for opening upthe Indian market. While we could see higher degree of aggression in global media, domestic onesused different tactics. Consciously concealing the truth, they painted a sorrowful and a miserablepicture of government companies bleeding with heavy losses standing on the verge of doom andthus pleading price hike to keep them afloat. Many of them extended passionate appeals callingupon masses to swallow the bitter pill of price hike to salvage the economy or nation as a wholeand thus to stand up for the occasion.A gloomy picture in global economy coupled with acute crisis in Eurozone has led to foreign capitalinflows to India drying up. Subsequently the economy, captive of hot speculative capital sawgrowth rate plummeting from 9% to 6.9%. With Indias quarterly growth rate at just 5.3%, the Indiangovernment is more than ever desperate in seeking foreign investors and latter has been ably arm

twisting the former to make terms of investment yet more favourable. Succumbing to this pressure,government has yielded by its discreet nod to fuel price hike.


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The Central Role for the Indian Working ClassUnder capitalism, private capital is the supreme authority and State is just an instrument to furtherits interests. In modern democracy, this responsibility is vested upon ruling party. In its rule of overpast 8 years, Congress led UPA government has truly lived up to this expectations by honestlyserving the interests of private capital. Release of Nira Radia tape saw Mukesh Ambani honestlyacknowledging ruling partys contribution by commenting Congress to apani dukan hai (Congress isour shop). However BJP staging fake protests at petrol hike is no different. It was Vajpayee led BJPgovernment that in 2002 dismantled Administrative Pricing Mechanism (APM) only to be replacedwith import parity pricing and current fuel hike is merely a logical outcome of this decision. In factthe party, dominated by Brahmins, Baniyas and other upper caste trading communities, having anoutright monopoly over private capital is only the natural expression of their interests. On theother hand, while the CPI-M, CPI rightly attack import parity pricing, but they have lost credibilityby its collusion with capitalists; Singur and Nandigram being only its visible manifestations.The situation is alarming. Petrol prices have been hiked and deregulation of diesel is just round thecorner with domestic gas price hike in waiting. All of this is bound to wreck havoc. With persistentcalls for further disinvestment of public sector, OMCs are pouncing hard demanding more flesh andblood. And all this so that astronomical amount of capital they have accumulated could be investedand they could reap higher profits from it. That is the real story behind petrol price hike.

The capitalist class and State would like to seek solace in the fact that previous petrol price hikessaw only sporadic protests and outbursts from masses without culminating into any big sustainedcampaign against it. But this solace may be short-lived. Nationwide bandh on 31st May gave aglimpse. With economy plunging into what could be a drawn out crisis, it is going to be increasinglydifficult to sustain the illusion of growth. With massive unemployment among youth and steadilyrising prices, mass discontent is brewing up. Frequently rising fuel prices are only going to fuel it toa flash point. Worst effects of global recession saw European continent witnessing naked classwarfare on its streets and it may not be too long before this reaches India!

1Some of the policy initiatives outlined seem unexceptionable. However, the macro

assumptions and hydrological overview call for closer scrutiny, as they can well mean

misplaced priorities and have other unintended, faulty outcomes. Consider, for instance,

demand management and water-use efficiency. The paper declares that water saving inirrigation use is of paramount importance (paragraph 6.5). But there is no attempt to focus

policy attention on the perverse and rising reliance on non-renewable, 'mined'groundwaterto

feed irrigation, the single-biggest usage.

Already, the figures suggest that some 55% of pan-India irrigation needs are now met from

groundwater, that 15% of all aquifers are in 'critical condition' and further that 60% of them

would be so affected over the next couple of decades sans purposeful, proactive policy.

Nor does the paper mention of the growing paddy acreage in the north-west of late, a region

not particularly suited for intensive rice cultivation. But such cropping pattern has been

wrongly incentivised thanks to warped policy and free power, which, in turn, has led to thewater table declining and caused much groundwater depletion.
http://economictimes.indiatimes.com/topic/groundwaterhttp://economictimes.indiatimes.com/topic/groundwaterhttp://economictimes.indiatimes.com/topic/groundwaterhttp://socialism.in/wp-content/uploads/2012/06/39pic.jpghttp://economictimes.indiatimes.com/topic/groundwater


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The paper merely mentions in passing that The Indian Easements Act, 1882, may have to be

modified, as it appears to give proprietary rights to a landowner when it comes to

groundwater under his land (para 2.2). The pressing need to step up waterstorage

infrastructure for irrigation and other needs does not quite find mention. India has a highly

seasonal pattern of rainfall, with about 50% of annual precipitation falling in just 15 days,

and 90% of all river flows taking place in barely four months.

Note also that multipurpose dams and other water systems in India can store up to only about

30 days of rainfall, a tiny fraction of that provided in both the high-income and middle-

income economies abroad. The paper does outline the need for "very small local-level

irrigation through small bunds, fields ponds, agriculture and engineering methods and

practices for watershed development" (para 6.6). However, keeping elementary topography in

mind - for a given volume, the less the depth of storage, the more the area of submergence - a

'small is beautiful' water policy may actually put more pressure on land, and have other

unintended consequences.

Hence the need to fast-forward hydroelectric projects in water-rich areas that have highgradient like the north-east, for relatively less submergence and other gains.

The paper enunciates that recycle and reuse of water, including return flows, should be

encouraged (para 6.3). The need to adopt better irrigation practices cannot be faulted, but we

do need to keep the macro issues in the forefront for proper policy analysis. For one, there is

the need to differentiate between consumptive and nonconsumptive use in irrigation.

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The water used by standing crops and plants, as also that lost due to direct evaporation, is

termed consumptive use, as it is removed from the land phase of the hydrological cycle. The

water that percolates down from fields and canal beds is known as non-consumptive use,

recharges as it does groundwater levels.

There is certainly scope to reduce consumptive use, by policy inducing, say, sustainable

cropping patterns. Better quality, bioengineered seeds should also reduce consumptive use.

As for non-consumptive use, adopting drip irrigation methods, canal lining, etc, would help

reduce loss under the head. But note that this would also likewise reduce the possibility ofseepage and groundwater recharge. So, the net effect of the various micro irrigation methods

at the basin and sub-basin level may be quite limited indeed.

For another, the policy purpose for recycling and reducing industrial demand must also keep

the macro picture in mind. True reduction in consumptive use by industry would require

revamp and innovation of industrial processes. Merely resorting to recycle and reuse would

not affect consumptive use. It would reduce usage to the extent water is recycled, but back to

back, it would also reduce return flow to the system by the like amount. Recycle and reuse

would nevertheless seem apt to meet pollution control standards. But here again, the policy

objective ought to be safe disposal of pollutants per se (to prevent leaching to aquifers) rather

than mechanical recycle and reuse.
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