The international price of crude oil has plummeted from a high of US$ 110 per barrel in June 2014 to a low of US$ 36 per barrel [lowest in 11 years] at present. In the back drop of the decision of OPEC [it accounts for 40% of world supplies and 85% of India’s import] not to take recourse to any output cut [a normal tactics employed by it in the past to prevent price from sliding], substantial pumping of oil by Iran, high production of shale gas in US and continuing slowdown in global demand, the price will continue to slide. Goldman Sachs predicts this to touch US$ 20 per barrel.
Considering India’s heavy dependence on import of crude for its energy requirements [to the extent of 75-80%], this has yielded a big bonanza in terms of huge savings in oil import bill and resultant improvement in current account deficit [CAD] which was 1.2% of GDP during the first quarter of current year and 1.6% during the second quarter despite continuing slide in export [courtesy, slow down in major world economies sans US]. This had generated expectation that people will get relief by way of lower price of petroleum products.
In the just concluded winter session of the Parliament, during discussion on the supplementary demands for grants in Rajya Sabha, opposition members lambasted the government for indulging in alleged ‘profiteering’ and not passing on the benefit of reduction in crude oil price to consumers by corresponding reduction in retail price of petrol and diesel. The charge is fallacious. At the outset, let us look at some facts.
Since June 2014 till date, price of petrol has been reduced 20 times leading to a reduction of Rs 13 per litre. Likewise, the price of diesel was reduced 16 times resulting in reduction of Rs 13 per litre. True, government has increased excise duty [ED] also. But, the increase in ED affected in 6 rounds [4 times between November 2014 and January 2015 and 2 times in November-December, 2015] was much less at Rs 9.65 per litre on petrol and Rs 7.97 per litre on diesel. Correspondingly, benefit to consumers was more than increased revenue to government resulting from hike in ED.
During April–October, 2015, average price of petrol was Rs 6.82 per litre lower than during April–October, 2014. On consumption of 12.6 million tons [17.78 billion litre & 1 ton=1.41 KL], savings to consumers was about Rs 12,000 crores. Likewise, average price of diesel during April–October, 2015 was Rs 9.28 per litre less than during April–October, 2014. On consumption of 42.6 million tons [51.54 billion litre & 1 ton=1.21KL], savings was around Rs 48,000 crores. Thus, total saving was Rs 60,000 crores. Annualized, the total relief to consumers would be about Rs 103,000 crores.
As regards ED, during 2014-15, additional collection due to the hike was Rs 22,000 crores. During 2015-16, annualized revenue gain due to increase in ED on petrol by Rs 9.65 per litre would be about Rs 26,000 crores [based on consumption of 19.1 million tons in 2014-15]. The revenue gain due to increase in ED on diesel by Rs 7.97 per litre would be about Rs 67,000 crores [based on consumption of 69.4 million tons in 2014-15]. Put together, the extra revenue garnered from petrol and diesel would be Rs 93,000 crores.
What is even more significant is the manner in which Modi – government has utilized the extra proceeds from increase in ED.
First, a significant portion of this has been transferred to the states as per the Finance Commission [FC] formula. During 2014-15, out of additional Rs 22,000 crores @ 32% [as per 13th FC] or Rs 7000 crores went to the states. During 2015-16, out of additional collection of Rs 93,000 crores, @42% [as per recommendations of 14th FC] or about Rs 39,000 crores would go to the states.
The balance proceeds retained by Union government i.e. Rs 15,000 crores during 2014-15 and Rs 54,000 crores during 2015-16 have been deployed for funding investment in infrastructure such as highways, roads etc. This point was made abundantly clear by finance minister, Arun Jaitely while replying to the demand for supplementary grants in Rajya Sabha which included approval for latest increase in ED [30 paise per litre on petrol and Rs 1.17 per litre on diesel] affected on December 16, 2015.
At a time, when the need of the hour is to revive investment to put the economy on an accelerated growth trajectory and private sector companies are not coming forward to take up investment [courtesy, their highly leveraged balance sheets due to huge loans taken by them in the past], there could not have been a more productive use of resources. Indeed, this has a much greater impact on the welfare of people than giving them relief by way of lower prices alone.
Jaitely also clarified that a portion of reduction in crude price was used to enable oil PSUs viz., Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL] recuperate their ‘inventory losses’ – estimated to be about Rs 30,000 crores. They had suffered these losses due to procuring crude at higher price and selling refined products at much lower prices [by the time crude is processed into final products, prices of latter have already declined in tandem with declining price of former].
Like investment in infrastructure, this too should be viewed as productive use of resources. After all, under a difficult scenario of rising crude price, these PSUs had played a crucial role in maintaining un-interrupted supply of oil products to run the wheels of the economy. Now, when the going is good [courtesy, decline in crude prices], it is imperative that their losses are plugged to keeping them financially healthy and robust.
In short, far from alleged profiteering [even so, such characterization does not gel with a government which is committed to people’s welfare], the present dispensation is using the gains from lower crude prices in the most judicious manner to give a boost to sustainable development by increasing investment with special emphasis on building infrastructure and building on India’s energy security by ensuring the health and growth of oil PSUs.
Clearly, it is a win-win for all stakeholders. Even consumers who may feel that they have been short-changed [not getting the full benefit of reduction in crude price], they will have reason to cheer from more of and better roads/highways helping them save fuel and time. Moreover, these savings are perpetual and will keep them in good stead when oil price is on upswing.