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Thursday, June 05, 2008

And the GOI Has a Kalpavriksham!

The price raise, based on global market prices, should have been "Rs 21.43 a litre on petrol, Rs 31.58 on diesel, Rs 35.98 on kerosene and Rs 352.99 on an LPG cylinder."

Instead, actual price raise, controlled by the wise Government of India was "Rs 5 per litre on petrol, Rs 3 on diesel and Rs 50 per cylinder of cooking gas LPG while keeping kerosene, the poor man’s lighting and cooking fuel, untouched."

How does the government plug the difference? By taking on more debt via oil bonds. Why? In order to control inflation which is already mangled by all sort economic distortions from agricultural products to steel.

Sure, short term inflation may be held down. But at what cost? First, oil bonds are the debt of the people, not some faceless government. The current users spurge oil at lower cost, but their children will be paying for it for decades to come.

Second, because the oil bonds are huge - subsidies are huge - they are going to crowd out productive investment in the economy impacting cost of borrowing for everything from infrastructure to agriculture investments. Here is what the oil bonds are going to take in:

"With the OMCs having to absorb Rs 20,000 crore of the loss as against Rs 16,125 crore last year, the leftover loss of Rs 135,000 crore would be handled by the government with the Finance Ministry issuing oil bonds every quarter based on actual numbers. However, to provide immediate liquidity to OMCs, the government would allow them to daily place Rs 1,000 crore of previous oil bonds with the central Reserve Bank of India in lieu of foreign exchange to import crude oil."
Third: because the actual price raise is a small fraction of what the price raise should be, energy consuming people will not make dramatic adjustments in their consumption habits. A Rs. 20 increase in petrol cost would surely make more people to drive cars less by curbing unnecessary driving or switching to two-wheelers and force vehicle owners to maintain their vehicles better to increase the mileage of the vehicles. A Rs. 300 increase in LPG cylinder would dramatically change peoples cooking habits ensuring minimum wastage of LPG. The prime motivation for changing peoples behaviour is taken away by not increasing prices of oil products to market levels.

Fourth: people, media, and opposition political parties would have forced the government to find more oil/gas within the country itself. Instead of underinvestment and slow progress of prospecting for oil and gas fields, there will be a big push for increased investment and, hopefully, increased privatization for finding and drilling activities.

And lastly: high oil/gas prices will create an immediate market for alternative energy sources - more people will use solar or alternative means to get energy. That in turn will boost investment in alternative energy, presumably low cost technology that we excel at, by private players who want to serve the alternative energy market.

The last three are critically important for future energy needs and future growth of the economy. The first two will surely hurt the economic growth in the long run.

None of these are achieved by subsidizing oil products and taking on more debt by the current government which will have to be paid for by future generations. In 2002-03, when price of energy was at a low point, there was considerable discussion in NDA government on allowing markets to determine price of energy that people consume in the country. Baby steps were taken. UPA, which came to power in 2004, folded the baby steps and went back to the old socialist ways of command and control of energy markets and distortion of prices.

Meanwhile Communists, partners in current government's bed, say they will hold dharnas. And BJP's Sri Advani takes a swipe at UPA that it's one more instance of UPA's bogus aam aadmi policies. And why not the swipes.

The only positive that seems to come out of this sorry oil story is that the government is cutting all kinds of taxes that are a norm on petroleum products in the country.
"The government took a hit on its revenue by cutting customs duty on all products by 5 per cent, abolishing that on crude oil and lowering rates on petrol and diesel to 2.5 per cent. It also cut the excise duty on petrol and diesel by Re a litre to Rs 13.45 and Rs 3.60 per litre respectively. While the increase in retail prices would bring in Rs 21,153 crore for the OMCs, the duty cuts would reduce their tax outgo by Rs 22,660 crore."
Let's hope those duty cuts will stay even after oil price come down to earth as it seem to finally indicate (down to $122 from $135 a future barrel of crude just a few weeks ago), although it's still very high.