Petroleum Prices, Why They Are So Important For Our Economy

By Gopal Krishna Agarwal

For understanding petroleum pricing in India: We have to break it into following aspects:

1.     Petroleum prices component

2.     Issues of under recovery and oil bonds during UPA

3.     Revenue to Central and State governments from the petroleum section.

      4.     Alternative Sources of energy and future planning for reduced dependence on oil

Petroleum products pricing is always a contentious issue. It has a large impact on inflation and also a major source of revenue for the Central and State governments, we import about 80% of our consumption needs. An increase of one dollar in the international price of crude oil increases the cost of our petrol and diesel by Rs. 0.50/ litre and one rupee fall in exchange rate against US dollar increase the cost by Rs 0.65/litre of petrol and diesel. We can conclude that the prices of petroleum products are determined in India by external factors. India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6,52,896 lakh crore.

Earlier under Administered Price Mechanism (APM) followed by UPA, petrol and diesel prices were not market determined.  Steep increase in international prices of oil used to put severe pressure on the oil marketing companies (OMC). Still their retail prices were kept below the cost, resulting in under-recoveries for OMCs. Between the year 2004 to 2014, the total under-recoveries was to the tune of Rs. 8,53,628 crores.

When the international crude prices were increasing, during the period of 2004-08 the subsidy by the government on petroleum products became insufficient. Since the fiscal position of the Government was very bad, there was no scope for increasing the subsidy. The government started issuing ‘oil bonds’ to the OMCs instead of giving cash subsidy. These interests bearing Oil bonds were not even reflected in the Budget provision by the UPA Government, resulting in distortion of fiscal deficit figures. During 2005 to 2010, oil bonds for Rs. 1,42,202 crore were issued,

with rate of interest on them ranging from 7.33 to 8.4 % per annum repayable up to 2024-25 by successive governments in the future. This was a case of postponing current liabilities on the future generation.

Bad fiscal prudence under UPA government resulted in increasing of the interest rates affecting borrowing and investment in the economy and higher inflation for the common men. While the petrol and diesel prices were artificially kept low, people were paying higher prices for almost every other thing. The burden sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of oil companies like ONGC, GAIL and OIL and destruction of their intrinsic market value.

The argument that high taxed on petroleum product in India needs to be brought down to control the spiraling prices has to be closely looked into.

Firstly, this revenue is required for catalyzing India’s economic growth, for building infrastructure for better quality of life and providing social security to the poor classes and in the backward areas. Secondly, large component of Central government duties on petroleum products i.e. 42% of the Basic Excise Duty is given to State governments and 60% of the balance 58% of the Basic Duty is spent on Centrally Sponsored welfare schemes in the States i.e. total amount transferred to the States by the Centre is (42+34.8)= 76.8 % of the Basic Excise Duty. It is also estimated that a one rupee reduction in the excise duty at the Centre would reduce revenue collection by Rs 14,000 crores.

Increase in the petroleum prices has different effect on the tax collected by the Centre and the States, which also has to be analyzed properly. In a decontrolled regime now being followed in India, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific tax, i.e., fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre goes down. The States, however, levy ad valorem taxes i.e. percentage based on prices and therefore with the increase in petroleum prices, its tax collection does not fall even with fall in consumption. Therefore, if the taxes on petroleum products have to be reduced in wake of the rising international prices, it should be done by the States first than by the Centre.

The solution to this teething problem on the long-term basis, is to change the share of petroleum products in energy consumption mix (34.48%, year 2015-16) We need to generate more energy from coal and lignite (46.28%), which and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75%).

Shri Narendra Modi government is working on this line. In the coming years we will definitely see a fall in the contribution of petroleum products in the overall energy share in our consumption.

Fuel for development

 Revenue from Centre’s taxes on petroleum products goes to states, welfare programmes.

There has been lot of hue and cry over the rising prices of petroleum products in recent months, but it seems that the central government is not going to oblige. The statement by former Finance Minister P Chidambaram, that the prices of petrol and diesel could be reduced was rejected by Arun Jaitley. The Centre has some compelling reasons not to tinker with the prices of petroleum products.

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The pricing of petroleum products is always a contentious issue. On the one hand, it has a large impact on domestic inflation and on the other, it is a major source of revenue for the exchequer. The dependence on imports — over 80 per cent of our consumption needs — undermines our capacity to determine its prices. A one-dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs 0.50/litre and a fall in the exchange rate of the rupee against the US dollar increase the cost of petrol and diesel in India by Rs 0.65/litre. Thus, for all practical purposes the price of petroleum products are exogenously determined.

During UPA rule, under Administered Price Mechanism (APM), petrol and diesel prices were not market-linked and the steep increase in international prices used to exert severe pressure on the oil marketing companies (OMC). The retail prices were kept below the cost, resulting in large under-recoveries for OMCs. From the year 2004-05 to 2013-14, the total under-recoveries was Rs 8,53,628 crore.

During 2004-08, when international crude prices were rising rapidly, the government subsidy on petroleum products proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy. The government resorted to issuing “oil bonds” to the OMCs in place of cash subsidy. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in the artificial measurement of the burgeoning fiscal deficit. Between 2005-06 and 2009-10, oil bonds worth Rs 1,42,202 crore were issued by the government interest on them ranging from 7.33 per cent to 8.4 per cent, per annum repayable up to 2024-25 by successive governments.

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This worsening fiscal situation under UPA led to the hardening of the interest rates affecting borrowing and investment for the corporate sector and runaway inflation for the common people. Thus, while the people where getting petrol and diesel at comparatively lower prices, they were paying much higher prices for almost everything else. The burden-sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of upstream oil companies like ONGC, GAIL and OIL and the destruction of their intrinsic value.

This brings us to the argument that petroleum products are highly taxed in India and they need to be brought down to control the spiralling prices. The contribution to central and state exchequer by the petroleum sector in the last few years is as follows: The Centre received Rs 1,26,025 crore, Rs 2,09,354 crore, and Rs 2,73,225 crore in 2014-15, 2015-16 and 2016-7 respectively, and an estimated Rs 2,84,442 crore in 2017-18. While the states received Rs 1,60,526, Rs 1,60,114, Rs 1,89,587 and Rs 2,08,893 in the same years.

India needs this revenue for catalysing economic growth, building infrastructure for better quality of life and providing social security to the poor and in backward areas. Second, a large component of central government duties on petroleum products — 42 per cent of the basic excise duty — is given to state governments. Also, 60 per cent of the remaining 58 per cent of the basic excise duty collection is spent on centrally-sponsored welfare schemes in the states. Thus, the total amount transferred to the states is (42+34.8)= 76.8 per cent. It is estimated that a Rs 1 reduction in the excise duty would reduce revenue collection by Rs 14,000 crore.

The effect of increasing petroleum prices on the tax collected by the Centre and the states needs to be understood clearly. In the decontrolled regime that India is currently following, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific — fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre also goes down. The states, however, levy ad valorem tax and it is likely that with the increase in petroleum prices, its tax collection goes up even with falling consumption. Therefore, if there is any merit in the argument that the taxes on petroleum products should be reduced in wake of the increasing international prices, it applies more forcefully to the states than to the Centre.

Ultimately, the long-term solution to this teething problem is to change the share of petroleum products in energy consumption mix (34.48 per cent in 2015-16). We need to generate more energy from coal and lignite (46.28 per cent), which we have in abundance and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75 per cent). The Narendra Modi government is working on this long-term solution and in the coming years we will see a fall in the contribution of petroleum products in the source-wise energy share.

Higher Education in India - Key to Inclusive Economic Growth

The large scale inequalities that we see in India today is mostly resulting from inequality of opportunities and not on the basis of choices or abilities alone.

Education is the greatest leveler. It is a potential tool in the empowerment of those sections of our society that suffers from various forms of exclusion even after seven decades of independence. It can also have strong equity enhancing and inequality reducing impact if it is easily accessible and affordable. Education also empowers individuals and society and promotes true public involvement in the development process - making it robust and participatory.

India’s higher education system is the third largest in the world, after China and the United States. This, however, is only in terms of numbers. So far as the quality of higher education is concerned, India compares very poorly. According to the World University Ranking for the year 2018 United States has 62 universities in the global top 200, China has 7 and India has none. It shows that while India has made great strides in terms of numbers, it has not paid adequate attention on the quality aspect of education. Another problem is that most students going for higher education from reputed institutions leave the country and go outside for work, resulting in brain drain.

Ancient India had paid great attention to education and ‘Gurus’ commanded respect even from the mightiest kings. The system of ‘Gurukulas’ was accessible to everyone and the prince and the pauper studies under the same roof. It was also free and at the completion of the education process, each student paid according to his capacity. During the later periods, India also had institutes of higher studies at Taxila and Nalanda, which attracted students from all over the world. The education system gradually withered away during the medieval era. The present education system in India is a legacy from Britishers, who developed the system to meet its own needs.

Education has been a focus area since independence because it was seen as a tool to promote rapid economic development of the country. Higher education was also supposed to remove social barriers and provide upward social mobility but India’s patchy record in this field has ensured that our economic growth remains far from inclusive. It is thus imperative that access to affordable education at all levels i.e. from elementary education to higher education is ensured to achieve the goals of inclusive growth.

Investment in human capital

Education empowers people with skills and knowledge and gives them access to productive employment in future. The productive capacity of an economy depends on three factors of production i.e. land, labour and capital. Quality of labour i.e. human capital is primarily based on the skill and knowledge embodied in its population. The development of a strong nation requires that the human resources of the country be endowed with higher level of education, skill and specialization, in addition to good health.

Literacy as a qualitative attribute of the population is one of the most important indicators of its preparedness to skill and specialise. As per our decadal census our literacy rate has been going up which shows that a large part of our population is in a position to embody higher human capital. What is needed is a focused approach by the government to boost investment in education and health to build human capital.

The expansion in the number of institutions of higher education and their intake capacity has not been able to ensure simultaneous sustenance of quality. There is a severe shortage of well-qualified faculty, teaching facilities and proper infrastructure. As such, the quality parameters associated with teaching and research needs sustained attention and policy focus by the government. Kothari Commission had recommended that the expenditure on education should be 6 percent of GDP but the Government has consistently failed to achieve this target. The expenditure on education in India hovers around 2-3 percent of GDP.

Tapping the demographic dividend

Demographic dividend is superficially understood as the increasing share of the working age population in the total population of a country. The positive effect of this youth bulge can be realized only if this population is healthy and educated and finds gainful employment. Failure to provide employment to youth having ‘degrees’ is a recipe for social disaster as their angst and frustration can lead to destructive outcomes.

According to the AISHE survey, 2015-16, the Gross Enrolment Ratio (GER) in Higher education in India is 24.5%, which is calculated for 18-23 years of age group. GER for male population is 25.4% and for females, it is 23.5%. For scheduled castes, it is 19.9% and for scheduled tribes, it is 14.2% as compared to the national GER of 24.5%. Thus our GER is not only low, it also has a class character. It is lower for females and even lower for disadvantaged sections of the society like schedule castes and schedule tribes. It must be borne in mind that if the our degree holders fail to get remunerative work, it is likely to deter others, especially those from the lower strata of the society, from pursuing education because it entails a huge opportunity cost.

The demographic dividend can be tapped by educating our youth (increasing the GER) but doing more of the same is not going to help matters. India faces a paradoxical situation in having a mass of educated unemployed while at the same time industries facing acute shortage of skilled workmen. The situation can be resolved by coming up with educational courses that will fill the skill gaps in the industrial sector.

Enhancing effectiveness of governance

Education is a crucial instrument to make humans aware of their rights and duties. This awareness leads to a more demanding populace and ensures better governance. An educated population leads to participatory governance and better & more informed policy-making. It is generally seen that countries, which have achieved higher educational levels for their population have better respect for the rule of law, constitutional norms and niceties.

Market-oriented and skill intensive

A chief problem of Indian education is its defective and unbalanced curriculum. The curriculum, which is prescribed for the study emphasizes only bookish knowledge and rote learning. It is, therefore, not surprising at all that Indian education system churns out millions of unemployable graduates year after year while the economy suffers from lack of manpower with requisite skill-set, while there is lack of research and development skill set in higher education. According to the All India Survey on Higher Education (AISHE) 2015-16 only 10 programmes out of approximately 180 cover 83% of the total students enrolled in higher education. It further showed that maximum numbers of students are enrolled in B.A. program followed by B.Sc. and B.Com. programs, only 1.7% colleges run Ph.D. courses.

It is evident from the above data that most of our students are taking traditional courses. These courses are not tailored to the needs of the economy. Even professional courses like Engineering lack the dynamism needed to respond to the changing needs of the job market. The present government has tried to address it by focusing on making education, market oriented and skill intensive, emphasizing on vocational studies. Under the ‘Skill India’ initiative of the Government of India, the goal is to empower the youth with skill sets, which make them employable and more productive in their work environment. Skill India offers courses across 40 sectors in the country and are aligned to the standards recognised by the industry and the government under the National Skill Qualification Framework. The courses help a person focus on practical delivery of work and help him enhance his technical expertise so that he is ready from day one of his job and companies don’t have to invest into training him for his job profile. Under the Atal Innovation mission, government has set up Atal Tinkering Labs to encourage experimentations at the school level and Atal Incubation Centres provide hand holding to give industrial linkages to technological innovations.

Technological advancement

The spatial distribution of institutes of higher education also poses a challenge for inclusive economic growth. College density, i.e. the number of colleges per lakh eligible population (population in the age-group 18-23 years) varies from 7 in Bihar to 60 in Telangana as compared to all India average of 28. Except for a few top universities and colleges, ensuring quality education in other institutions has also been one of the biggest challenges for the government.

Technological advancements provide us with an opportunity to overcome these challenges. With the increasing penetration of high-speed Internet connection in India, higher education in India need not be location or college specific. High quality videos on various regular and professional courses can be made and shared online for them to be freely accessible. Students can watch these videos and then take exams at their convenience. For this to materialize the government should provide conducive regulatory environment. Educational institutions should be well regulated, having good infrastructure facilities and there is growth in the sector, attracting requisite resources for development.

 Conclusion

The state of higher education in India leaves much to be desired. Though governments’ initiatives have created islands of excellence like the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM) etc., most of the other universities and colleges are not up to mark. Admission to such colleges is not always possible due to issues of accessibility and affordability. Students also lack proper guidance on the available educational facilities and carrier counseling. The central and the state governments need to focus on higher education to make it more inclusive, purposeful and skill oriented. It will go a long way in making India’s economic growth more broad-based and inclusive.