Petroleum Pricing in India – Economics override political expediency

Petroleum prices are always a contentious issue. Historically, political expediency overrode economic considerations. Central government has some compelling reasons not to interfere into market forces, which are currently being effected by global factors. 

India imported 256.32 million metric tonnes of crude oil and petroleum products in 2017-18 and paid Rs. 6,52,896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent. Further the Indian basket of Crude Oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of Crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

It is also important that we look into the tax structure and petroleum prices. On 3^rd September 2018, the price build-up for Diesel and Petrol in Delhi was as follows:

Sl. No.	Description	Unit	Petrol	Diesel
1.	C&F (Cost & Freight) Price (Moving average basis)	$/bbl	84.20	90.59
2.	Average Exchange rate	Rs/$	70.22	70.22
3.	Price Charged to Dealers (excluding Excise Duty and VAT)	Rs/Ltr	39.21	42.85
4.	Add : Excise Duty	Rs/Ltr	19.48	15.33
5.	Add : Dealer Commission (Average)	Rs/Ltr	3.63	2.51
6.	Add : VAT (including VAT on Dealer Commission)	Rs/Ltr	16.83	10.46
7	Retail Selling Price at Delhi- (Rounded)	Rs/Ltr	79.15	71.15

(Data from Indian Oil Corporation Limited)

With every dollar increase in the international price of crude oil, the cost of petrol and diesel in India increases by Rs. 0.50/ litre and a fall in the exchange rate of Indian rupee against US dollar increases the cost of petrol and diesel in India by Rs. 0.65/ litre.

The revenue generated by the taxes on petroleum products is very important for both the Central as well as State Governments. The contribution to central and state exchequer by the petroleum section is significant and in the last few years is as follows:

Year		2014-15		2015-16	2016-17	2017-18 (P)
1.	Contribution to Central Exchequer (in crore) through Tax/ Duties on Crude oil &  Petroleum products	1,26,025		2,09,354	2,73,225	2,84,442
2.	Contribution to State Exchequer (in crore) through Tax/ Duties on Crude &  Petroleum products	1,60,526		1,60,114	1,89,587	2,08,893
3.	Total Contribution of Petroleum Sector to Exchequer through Tax/ Duties      (1+2)	2,86,551	3,69,468		4,62,812	4,93,335

We have to remember that, 42% of the Basic Excise Duty collection at the Centre is given to State governments for infrastructure and welfare programs and 60% of the balance 58% of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent. And every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

Earlier, Under Administered Price Mechanism (APM), petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities 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 crores and there was significant subsidies for the same.

Year	Under-recovery (crore)	Cumulative Total (crore)
2004-05	20,146	20,146
2005-06	40,000	60,146
2006-07	49,387	1,09,533
2007-08	77,123	1,86,655
2008-09	1,03,292	2,89,947
2009-10	46,051	3,35,998
2010-11	78,190	4,14,188
2011-12	1,38,541	5,52,729
2012-13	1,61,029	7,13,759
2013-14	1,39,869	8,53,628

The subsidies for these under recoveries, during the period of 2004-08 when the international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the Government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds called, The Oil Bonds were not even reflected on the balance sheet by the UPA Government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, the Oil Bonds worth Rs. 1,42,202 crore were issued by the Government with rate of interest ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at discounted rate because the bond market did not have much appetite for these bonds. Till date the Government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25, putting heavy burden on current as well future governments.

An important part of the solution to the problem can be focusing at the alternative energy source. In the year 2015-16, the source wise share in consumption of energy was as follows:

Sl. No.	Source	Share ( in percentage)
1.	Coal and Lignite	46.28
2.	Crude Petroleum	34.48
3.	Electricity from hydro, nuclear and other renewable sources	12.75
4.	Natural Gas	6.49

Therefore the policy of the Shri Narendra Modi government is to move towards renewable sources of energy. But one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long drawn process, which can be accelerated by conducive government policies. Modi Government is working on this long-term solution.

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focussed on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source wise energy share in the coming years. Till then economic prudence should override political expediency.

Gopal Krishna Agarwal

National Spokesperson of BJP on Economic Affairs

Member Board of Governors Indian Institute of Corporate Affairs (IICA)

gopalagarwal@hotmail.com

Is Good Economics Bad Politics!

Economics relates to allocation of resources to various segments of the economy. It can tell you the methodology or the means of allocation of resources for enhancing production, efficiency in distribution and equitable consumption. There is always a tradeoff between competing demands in any economy as the resources are limited. Good economics implies following such economic policies that pushes the ‘Production Possibility Curve’ outwards. Politics can broadly be understood as the means to the political power. Success in politics is achieved by taking steps that increases the possibility of winning elections.

Good Economics ensures larger benefits to the large population. And if political parties work towards the wellbeing of large sections of society winning elections thereby, it is good economics and good politics. The effective communication with the electorate about the outcome of economic decisions and level of awareness & education of the citizens, determine, whether good economics is good politics.

In a democracy, where demands are generated by different stakeholders, there is a political cost to every decision. Technocratic prescriptions can ignore the political economy but a politician will always keep an eye on the political consequences of any economic policy. 

Political cost to economic decisions can be reduced through better communication skills of leadership; successful leaders are generally good orators. Cost reduction can also be achieved by increased educational outreach and higher level of awareness amongst the electorate. The time frame for impact assessment of economic decision will also determine the correlation between the economic decision and its political cost. Because the result of some of the steps taken by the government might take years to be reflected in changed ground realities, but the elections have to be won every five years. In India the problem is further compounded by the fact that we have multiple elections at the Centre and the States.

At times, powerful interest groups with high stakes in maintaining status quo, exists within a Nation. Their own compulsions take precedence over economic decisions leading to bad politics. Sometimes divisive forces in a society raise their head and bog down the decision making process of the state, creating chaos. Existence of strong public institutions and pillars of democracy is a safeguard for decision-making process. The selection criterion for the right candidate by the electorate at the elections, influences the considerations for decisions of the political parties. In an ideal democracies good economics is always good politics, but rarely such situations exists, otherwise how you can explain farm loan waivers and subsidies instead of investing resources in infrastructure for better quality of life.

Mostly, the form of governance and prevalent political structure, determine, whether good economics is good politics. Nations should build sustainable institutions to; safeguard minority interest and maintaining balance of power between pillars of governance and holding free & fare elections. Countries spending on education, transparency, information sharing and disclosers establish a healthy and a vibrant political system. Then alone a positive relationship between good economics and good politics is sustained.   

By Political System we mean a system of government. Political System is a complex system of categories involving the question of who should have authority and ownership of resources and what the government’s influence on its people and economy should be? And Political Structure refers, to institutions or groups and their relations to each other, their pattern of interaction within political systems and to regulations, laws and the norms present.

Out Constitution specifically says that Political Democracy has no meaning till we achieve Economic Democracy. Economic Democracy means that the benefits of economic development reach to all the segments of society, across caste, religion and geography. This equity can only be achieved by good economics.

In a mature and just nation, Good Economics is Good Politics; Economic Democracy and Political Democracy coexist in an efficient governance model. If this healthy relationship is non-existent, then there is lot to be desired from the institutions, government, political parties and the citizens, all taken together.

Gopal Krishna Agarwal, National Spokesperson for Economic Affairs, BJP

Email: gopal.agarwal@bjp.org

Mobile:  9810019753

NRC: The Soul of Assam Accord

Opposition parties are once again looking for political opportunities in a situation, which has the risk of blowing up because of their incendiary rhetoric. Every attempt is being made to create a crisis where it does not exist. It is grossly premature right now to speculate on the future of the people who are being authoritatively identified as illegal immigrants. Religion, region and caste have always affected politics but governance has to be above it.

A perfectly legitimate exercise by the Assam government under an Assam accord has now led to a deplorable and condemnable reaction from the opposition parties. The Congress Party and its national president Rahul Gandhi must make his stand clear on the issue of illegal immigrants from neighboring countries. Historically, both Mrs. Indira Gandhi and Mr. Rajeev Gandhi had committed, that post 25th March 1971 migrants would be detected, identified and deported. It was the Congress that had agreed to the preparation of NRC but later did nothing in this matter because these immigrants were mostly Muslims and it cultivated this group as its vote bank.

For its vote bank, Congress was encouraging illegal immigrants left, right and center. It also tried to subvert Foreigners Act 1946 by bringing Illegal Migrant Determination by Tribunal (IMDT) Act, 1983 which was stuck down by The Supreme Court in 2005 in the case filed by the present Chief Minister of Assam, Sarbananda Sonowal vs UOI (2005), by stating that IMDT “has created the biggest hurdle and is the main impediment or barrier in the identification and deportation of illegal migrants”.

The Conduct of Congress in the whole affair requires a closer scrutiny. The IMDT Act had virtually made it impossible for the government to identify and deport illegal immigrants. The constitutionality of this Act was challenged in the Supreme Court of India, in the affidavit filed by the Assam Gana Parishad (AGP) led Assam Government on 28^th August 2000, stated that the State Government has been persistently writing to the Central Government that the IMDT Act was operating against national interest and therefore the Central Government should repeal the IMDT Act. In May 2001, AGP was defeated in the Assam elections and the Congress led government came to power. On 8th August, 2001, the Congress government of Assam moved an application in the Supreme Court praying that the State of Assam be permitted to withdraw the earlier affidavit and be allowed to file a new affidavit, stating that ….the IMDT Act is constitutional and there is no question of either repeal or striking down of the Act."

At the Centre, The Atal Bihari led NDA government filed its affidavit in the matter on 18^th July, 2000, in which has it stated that a proposal to repeal the IMDT Act was under consideration of Government of India.  However, after the Congress led UPA government came to power at the Centre in 2004, another affidavit was filed in the matter on 24^th November, 2004 wherein it was said that though in the earlier affidavit a prayer was made to examine the constitutional validity of the IMDT Act, but on reconsideration the Central Government had taken a decision to retain the IMDT Act in present form in its application to the State of Assam. Ultimately Hon’ble Supreme Court stuck down IMDT act in 2005. The Court further observed: “The dangerous consequences of large scale illegal migration from Bangladesh, both for the people of Assam and more for the Nation as a whole, need to be emphatically stressed. No misconceived and mistaken notions of secularism should be allowed to come in the way of doing so”.

 

It would not be an exaggeration to say that at the root of every socio-politico problem in the country lies the myopic politics of the Congress. The flip-flop resulting from this myopic vision is evident on its stand on Triple Talaq, Supreme Court judgment on maintenance to Shah Bano, illegal immigrants from Bangladesh, Ram Temple at Ayodhya, plight of Kashmiri Pundits, Minorities having the first right on the national resources, etc. Communalizing Indian politics to the core.

Similarly, Ms. Mamta Banerjee’s ambitions have also pole-vaulted in recent times; she sees it as an opportunity to consolidate her Muslim vote-bank in West Bengal. She has dishonestly compared this as a restriction on interstate movement of citizens of India and is trying to make it a Hindu-Muslim issue. We hope she explains her stand on the issue of illegal immigration from Bangladesh. Earlier on 4^th August 2005, she had stated in the Lok Sabha: “The infiltration in Bengal has become a disaster now. You can see the Bangladeshi as well as the Indian names in the list. I have both the Bangladeshi and the Indian voters list. This is a very serious matter. I would like to know when would it be discussed in the House?”. The silence and ambivalence of other political parties like the CPI, CPI (M), BSP, SP, RJD also reeks of hypocrisy.

Under governance parlays, how much does it matter if 70 percent of the people left out from NRC are from the Muslim community? After all, the illegal immigrants, who came in hordes into Assam, are not refugees. The movement under the banners of AASU AAGSP had emerged because the unabated influx of illegal foreigners in to Assam had raised substantive fears in the minds of the local people about its adverse effects on their social, political, cultural and economic life. The 2011 Census of India shows Assamese-speakers have become a minority in their home state. Between 1991 and 2001, their population had declined from 58 percent to 48 percent. In terms of religious communities, the Muslim population of Assam had increased from 25 percent in 1951 to 34 percent in 2011.

All political parties should express their stand on the issue of illegal immigrants into India in no uncertain terms so that we all know where they stand on this matter. Fear mongering and hyperventilation would not serve the interests of the nation, as would keeping quiet on the issue.

Gopal Krishna Agrawal

National Spokesperson of BJP

gopal.agarwal@bjp.org

The Economy Deplomacy Is a Key To Enhancing Nepal - India Relation

Gopal Krishna Agrawal is the National Spokesperson on Economic Affairs for ruling Bhartiya Janata Party of India. How does he see Nepal-India economic relations? How can this relations be enhanced? Mahavir Paudyal and Kosh Raj Koirala spoke to him on Nepal-India economic ties and other aspects of bilateral relations while he was in Kathmandu last week.

How do you see the current status of Nepal-India relations?

We are working on making Nepal-India relations much better than what it is today. Nepal is very important country for India’s international relations. This is why Prime Minister Narendra Modi visited Nepal right after assuming office in 2014. We find so many common issues with regard to economy between Nepal and India. Thus we can have a very good business and economic relations. Economic relations are much important for these countries because economic relations are becoming more important between and among the countries across the whole world. Economic issues can be more easily identified and they are as easier to resolve because they are based on give and take and mutual benefits. There will be few contentions in business relations than would be with political relations. You say so but Nepal has had huge trade deficit with India. 

One of the ways would be if the two countries maintain relations with industrialists with both sides, instead of focusing on only government-to-government relations.  It’s better for Nepal and India to organize bilateral economic conclaves at a reasonable frequency so that they can discuss issues and find solutions.  Private sector bodies of Nepal can have direct contact with Indian investors through Indian business organizations.  If they talk with each other directly, many things can be settled. The government of Nepal can also communicate their policies directly with the Indian industrialists. If Nepal establishes direct contact with Indian industrialists, it would know their concerns and also find out the factors that have hindered investment in Nepal.  The government will also come to know directly what their concerns are and how those concerns can be addressed. Equally important is to incentivize the investment.  Creating Special Economic Zones, cluster development models, integrated supply chain models with global suppliers etc are some incentivizing factors.  They have done a lot for India. Such ideas might be as useful for Nepal.  
You cannot look into any initiative in isolation.  When our party took over, there was a problem with regard to tax compliance and large part of business transaction was not being channeled through financial institution mechanism.  There was a need to push transaction through digital banking. We had to establish the audit trail of business transactions. And there was a need for identifying the concerns of liquidity and the issue of shifting the informal sector into formal sector. Several other steps together with demonetization helped into creating an ecosystem whereby we are moving informal sector into formal sector.  The GST could not have been as successful if we had not made concerted efforts to moving towards digital economy and digital banking. Cumulatively, demonetization has created an ecosystem that has greatly helped minimize corruption. We have been able to establish audit trail of all transactions.  The government has deregistered around four hundred thousand companies found in money laundering. Because of these steps, we now have more transparent and corruption-free ecosystem and it’s easier to do business in India. Most of all, tax compliance has increased, thanks to the audit trail.  
I think this is for Reserve Bank of India to decide. Central banks of Nepal and India should work to resolve issues related to Indian currency in Nepal.  
Rise of petroleum price and depreciation of Indian rupees against dollars are two issues facing us at the moment. There are global factors behind it. This could have been addressed by direct intervention by the central bank but the government has decided it is not yet time for intervention for domestically we are in better situation. Our GDP grew by more than 8.2 percent.  Inflation is well under control. It is 3.6 percent at the moment. Our foreign exchange reserve is more than 24 billion dollars, which is very healthy. Our current account deficit is well within the limit.  And we are getting a lot of FDI. Depreciation is largely driven by external factors. Our domestic factors do not require us to act for immediate strong measures. 
You should not take one or two sporadic incidents and make a judgment. The intention of the Indian government is very clear.  Our focus is on smooth trade between the two countries and establishing even better connectivity for this.  We are developing connectivity infrastructures including with Nepal to enhance trade relations.  India has put BBIN in priority for the same purpose.   The government is open to resolving all kinds of issues. Media reports sometimes create completely different perceptions. We need to read them critically. We have good trade relations even with countries with which India does not have so special relations.  We have special relations with Nepal.  There is no reason why we cannot have smooth trade with the neighbor with which we have a special relations. 
I think it is unwise to link what you call blockade with Hindu concern. Indian government has consistently denied blockade. Yes, India showed some concern for people of Tarai but at the same time India has always maintained that it’s up to Nepal to do whatever is best for Nepal.  The opinions of general people should not be equated with opinions of the government.  As for Hindu state, we had always appreciated Nepal as a Hindu state because over 85 percent of Nepalis are Hindus.  India is also a Hindu dominated country. So there have always been positive sentiments among Indians regarding Hindu state status of Nepal.  But that too, like I said, is the public opinion.  India is a secular country. We cannot say what should be the status of Hindu religion in Nepal. It’s for Nepal to decide.  The government does not have any position on this.  What individual leaders say are individual opinions. They should be understood as such.

I was recently speaking on foreign direct investment issue here in Nepal. Across the world, every country is looking to attract more FDI.  FDI is one of the criteria which decide what will be the future of country’s economy. It is important for capital formation and building of infrastructures. India has been successful in attracting huge FDI over the last few years. We have been able to get 62 billion dollars of FDI, which is the highest FDI across the world.  But a country cannot raise FDI rate simply by asking others to come and invest. Most of such investments come from the private sector. And private investment comes to those places where you have strong regulatory bodies.  They look into which regulatory set ups are there that can come to their aid when something goes wrong with business. Foreigners are ready to invest in India because we have strong and autonomous setups in many the fields such as banking, capital market, insurance, telecommunications etc. For each of these sectors, we have a separate regulatory body to boost the confidence of the investors. 

Thus the more you build autonomous and independent regulatory institutions the more it will raise confidence of foreign investors. And the more you will be able to attract FDI. I think this applies to Nepal as much it does to India. 

The importance of FDI is obvious but how can Nepal reduce trade deficit with India?

Many Indian investors are willing to invest in Nepal. Nepal has a lot of hydro potentials. After the success of Arun III more companies are interested to come to Nepal and invest.  Indian companies are also interested to invest in tourism, education and many other sectors. Private education industrialists can set up their institutions in Nepal.   If two countries have good business relations it will directly contribute to minimizing tensions, if any, on diplomatic and political fronts.  Economic diplomacy can become a key tool in further enhancing Nepal-India relations.  This is what is happening globally. Leaders across the globe are now more focused on economic issues. Through economic cooperation and considerations it is easier to build better diplomatic relations.

The demonetization drive was criticized by some sections at one time. How has it helped Indian economy? 

Demonetization has affected a lot of Nepalis. The government of India has refused to exchange Indian currency possessed by many Nepalis. One of economic issues in India at the moment is depreciation of Indian rupees against US dollars. This might have direct bearing on Nepali economy for our currency is pegged with Indian currency.Exporting ginger to India from Nepal has rarely been a hassle-free undertaking. Now and then Nepal-bound containers are held up in Kolkata port. One of the persistent concerns of your party has been regarding Hinduism in Nepal. One of the former Nepali prime ministers recently said India imposed blockade on Nepal in 2015 because Nepali leaders failed to address India’s concern related to Hindu state. 

Fuel Price Crisis: Issues Behind Petroleum Rates Explained in 7 Points; Lowering Dependency On Oil a long Drawn

By Gopal Krishna Agarwal, 

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources.

India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6, 52, 896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent.

What is the benchmark crude price for India and how is it determined?

The Indian basket of crude oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

What is the tax structure on petrol and diesel?

On 3^rd September, 2018, the price build-up for Diesel and Petrol in Delhi was as follows

Every 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 Indian rupee against US dollar increase the cost of petrol and diesel in India by Rs. 0.65/ litre.

What is the revenue generated by taxes on petroleum products?

The contribution to central and state exchequer by the petroleum section in the last few years is as follows:

42 percent of the Basic Excise Duty collection at the Centre is given to state governments for infrastructure and welfare programs and 60 percent of the balance 58 percent of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent.

Every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

How does the picture of under-recovery in the oil and natural gas sector look like?

Under Administered Price Mechanism (APM) earlier Petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities 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 crores.

Why oil bonds issued and what were is their current status?

During the period of 2004-08 when the international crude prices were increasing rapidly, the government started subsidizing petroleum products proved grossly insufficient but since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The government resorted to the issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in 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 with the rate of interest on them ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at a discounted rate because the bond market did not have much appetite for these bonds. Till date the government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25

How crucial are petroleum products in our energy mix?

In the year 2015-16, the source-wise share in consumption of energy was as follows:

How can India reduce its dependence on crude oil?

Petroleum products are important because one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long-drawn process, which can be accelerated by conducive government policies. Modi government is working on this long-term solution.

 It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focused on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source-wise energy share in the coming years.

Why Renewable energy is so vital for India

By Gopal Krishna Agarwal,

Petroleum prices have always been a contentious issue in India. Historically, political expediency overrode economic considerations. The central government has some compelling reasons not to interfere with market forces, which are currently being affected by global factors.

 India imported 256.32 million metric tonnes of crude oil and petroleum products in 2017-18, for which it paid Rs 6.53 trillion. India's import dependence in crude oil is over 80 per cent. The Indian basket of crude oil represents a derived basket comprising of sour grade (Oman and Dubai average) and sweet grade (Brent dated) of crude oil processed in Indian refineries in the ratio of 72:28 in 2016-17. The price of the Indian crude oil basket was $106.85 per barrel (1 barrel = 159 litres) in May 2014. It declined to $39.88 per barrel in April 2016, and has gradually increased since then and is around $78 per barrel now.

 

It is important that we look into the tax structure and petroleum prices. On September 3, 2018, the prices of diesel and petrol in New Delhi were Rs 71.15 and Rs 79.15 respectively (rounded off). With every one-dollar increase in the international price of crude oil, the cost of petrol and diesel in India increases by Rs 0.50 per litre, while a fall in the exchange rate of the rupee against the US dollar increases the cost of petrol and diesel by Rs 0.65 per litre.

 

The revenue generated by taxes on petroleum products is vital for both central as well as state governments — the total contribution to the central and state exchequer was Rs 4.93 trillion in 2017-18.    

 

It is important to remember that 42 per cent of the basic excise duty collection at the Centre is given to state governments for infrastructure and welfare programmes and 60 per cent of the remaining 58 per cent is spent on centrally sponsored welfare schemes in the states. The total amount transferred to the states is thus 76.8 per cent (42+34.8). Every one-rupee reduction in central duty leads to a loss of about Rs 140 billion to the central exchequer.

 

Earlier, under the Administered Price Mechanism (APM), when petrol and diesel prices were not market-linked and prices were being modulated, the steep increase in international prices of oil exerted severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below cost, resulting in large under-recoveries for OMCs. Between 2004-05 and 2013-14, total under-recoveries amounted to Rs 8.53 trillion and there were significant subsidies.

 

Subsidies for these under recoveries during the period 2004-08, when international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of “oil bonds” to the OMCs. These interest-bearing oil bonds were not even reflected in the balance sheet of the UPA Government, resulting in artificial measurement of the burgeoning fiscal deficit.

 Between 2005-06 and 2009-10, oil bonds worth Rs 1.42 trillion were issued by the government, with a rate of interest ranging from 7.33 per cent to 8.4 per cent per annum, repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1.25 trillion and had to bear a loss of around Rs 50 billion in selling these bonds at discounted rates, because the bond market did not have much appetite for these bonds.

 

So far the government has repaid around Rs 700 billion to the holders of these bonds. Of this amount, only about Rs 100 billion has gone into repayment of the principal component and the rest towards the interest obligation. The outstanding principal amount on these bonds is thus Rs 1.3 trillion. Most of these bonds will mature by 2024-25, imposing a heavy burden on current as well future governments.

 

An important part of the solution to the problem will have to be a focus on alternative energy sources. In 2015-16, coal and lignite accounted for 46.28 per cent of India’s energy consumption; crude petroleum for 34.48 per cent; electricity from hydro, nuclear and other renewable sources of energy for 12.75 per cent; and natural gas for 6.49 per cent.

 

Therefore the policy of the NDA government is to move towards renewable sources of energy. But one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil will be a long-drawn-out process, which can be accelerated by supportive government policies. The Modi government is working on this long-term solution.

 

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance, and also focus on electricity generation from hydro and other renewable sources such as wind and solar. Since the government is focussed on having one GWh of installed solar capacity by 2022, we will see an increase in its share in the source-wise energy consumption in the years ahead. Until then economic prudence should override political expediency.