The decision of the UPA government on Wednesday to increase petrol prices by Rs 5 a litre, diesel by Rs 3 and that of cooking gas (LPG) by Rs 50 a cylinder is indeed a bold one. The hike is the highest so far and many believe that the move will have strong political repercussions. Within hours of an announcement on the fuel price hike, political quarters are ruife with rumours that there will be a rollback in the prices of LPG by at least Rs 25 a cylinder and that in the petrol and diesel prices by Rs one a litre each.
Notwithstanding the political implications, a decision to increase the fuel prices was the need of the hour. With no increase in retail prices, the revenue losses of the state-owned oil marketing companies?Indian Oil, HPCL and BPCL, was projected at Rs 2,45,303 crores for the current fiscal. Although some softening has been witnessed in the international oil market in the past few days, the Indian basket of crude oil is still high at $123 a barrel (after touching a high of $129 a barrel last month)?incidentally the same level as international crude prices which were trading at $124.01 a barrel in New York on Wednesday. The last time that petrol and diesel prices were raised was in February when the Indian basket of crude oil was at $67 per barrel.
Who could imagine such a steep increase in the global prices of crude oil? From the country?s point of view, a look at the prices of Indian basket of crude oil shows that ever since the dismantling of the administered pricing mechanism (APM) from April, 1, 2002, there has been a steady increase in the prices.
From an average of $26.65 a barrel in 2002-03, the price of Indian basket of crude oil surged to $27.97 in 2003-04, $39.21 in 2004-05, $55.72 in 2005-06, $62.46 in 2006-07 and $79.25 in 2007-08. In April 2008, the average price of Indian crude oil basket was around $105 a barrel while that in May 2008 was close to $114 and for June (four day average) at above $126 a barrel.
With a daily loss of over Rs 720 crore, the fund crunch being faced by the three oil firms was so huge that these companies decided to ration supplies of petrol and diesel to the petrol pumps. All three announced that they will soon be left with no cash to even import crude oil. BPCL and HPCL had issued a warning of running out of cash to even import crude oil by July while IOC said it too could sustain crude imports till September. The situation had become so alarming that the oil marketing companies had even threatened to restrict supplies of diesel and LPG, both of which are being imported to meet domestic demand.
The bail out package announced by the government on Wednesday is the best so far by any standards. The oil companies have been adequately compensated. Besides the price increase, the government also announced an across the board 5% reduction in customs duty?by bringing down rates on crude to zero and that on petrol and diesel to 2.5% (from the earlier 7.5%) and on other products like jet fuel, naphtha for non-fertiliser use and others from 10% to 5%. Besides, excise duty on petrol and diesel has also been reduced by Rs one a litre to Rs 13.45 and Rs 3.60 respectively.
While the price hike will help bring down the losses of oil marketing companies by Rs 21,123 crore, the duty cuts would mean another Rs 22,660 crore for the oil companies.
That?s not all. The government has also decided to bear an additional burden of Rs 94,601 crore by way of oil bonds to state-run BPCL, HPCL and IOC . The subsidy burden sharing or upstream assistance by ONGC and OIL has also been increased from the existing Rs 26,000 crore to Rs 45,000 crore.
The three oil refining and marketing firms will together absorb another Rs 20,000 crore as against their earlier share of Rs 16,000 crore. Therefore, the total burden to be absorbed by the oil PSUs will be Rs 65,000 crore.
On the high level of state taxation, Deora said the Prime Minister has assured that he will take up the issue of high taxation by states with the chief ministers shortly.
The bail out package announced by the government on Wednesday is not the only relief which the oil marketing companies have got. The relief measures announced by the Reserve Bank of India last week also needs to be taken along. Oil companies, facing severe liquidity crunch, will get relief on the liquidity front through RBI’s move to buy oil bonds at face value. Until now, oil companies were forced to liquidate bonds at a discount of 10-15%. The oil companies have been allowed to liquidate bonds upto a level of Rs 1000 crore a day for which the central bank will pay them in dollars. The forex can then be used by the oil companies for meeting the payment commitment for crude oil imports.