People's Democracy

  Petroleum Pricing Policy vis-a vis Policy of Liberalisation

                                                                          Swadesh Dev Roye

THE current debate on the question of retail pricing of petroleum products is not merely a matter of arithmetical exercise aimed at addressing the commercial malady emerged from the steep hike in the price of crude oil in the international market as is projected by vested interests. It is very intimately related to the policies of privatisation pursued by the successive governments at the centre. It is really a political question concerning the people and the country.

THE ‘IMPORT PARITY BASIS’, THEN AND NOW

We have concrete documentary evidence to substantiate that the successive governments at the centre in its subservience to the Fund-Bank dictated policy, adopted the current practice of ‘import parity basis’ for fixing the prices of the crude oil and petroleum products not to support the oil PSUs but to appease and attract the international and indigenous private capital. This argument is strengthened from the highly discriminatory taxes and duties policy of the government favouring the private sector and burdening the public sector. 

It may be recalled that the idea of pricing of petroleum products on import parity basis had its origin when the oil sector in India was totally under the control of foreign oil MNCs. How the foreign oil companies imposed atrocious conditions on the country on these issues has been vividly narrated in the book entitled K D Malaviya and The Evolution of India’s Oil Policy.  

The chapter of the book captioned – ‘The Anglo-American Oil Companies and the Indian Refinery Agreements’ has recorded stunning facts as to how the foreign oil companies ruthlessly imposed atrocious conditions in establishing crude oil refineries in the country.  “locally produced products must be priced on a basis of equality with imported products, that price ex-refinery might be established, from time to time, at any level not higher than Bombay landed cost, including wharf age and import duty.”  Further that, “even though crude oil and refined products were almost wholly imported from the Arabian Gulf region, principally from sources owned and operated by the concerned foreign oil companies or their affiliates, for purpose of pricing, it was assumed that the crude oil and the products had originated from the Gulf of Mexico and, therefore, billing to the Indian affiliates was made on a notional basis of f.o.b US East Coast Price plus freight there from to India.”

It is interesting to note that commenting on the post 1991 surrender of the government to the oil MNCs, the CITU had commented in one of its organisational report on Oil sector on September 23, 1996 that “….Such concessions were not given to MNCs even prior to nationalisation when we had nothing in oil industry. But now when we have established a sound base through our public sector network in the oil industry, the government is unnecessarily succumbing to the pressure of the oil cartels.” Un-fortunately such formulations are all the more relevant today.

In the current context too, the factor that is playing havoc in the whole episode of oil pricing is  ‘Import Party Basis’. In fact, even when Administered Pricing Mechanism (APM) was in operation and much before the official adoption of the policy called ‘Import Parity Basis’, the government allowed ‘import parity’ pricing to a private foreign oil company which marks perhaps the first ever entry of such oil company in the upstream sector with the opening up of the hydrocarbon sector under the policies of economic liberalisation. The Production Sharing Contract between Oil India Ltd and Geopetrol International Inc, France was signed on June 16, 1995 contracting out the Kharsang Oil Field, Arunachal Pradesh. At page: 61 the clause 19.4.1 of the contract agreement provided, “the price of all sales … be determined on the basis of either the FOB selling price per Barrel of one or more crude oils which, at the time of calculation, are being freely and actively traded in the international market.” 

Thus the import parity system was introduced under the pressure of foreign oil companies in 1948, it was withdrawn in 1976 and again reintroduced in 1997, this time too due to the pressure of the foreign oil companies. After three decades’ of our political independence, where do we stand on the question of our economic sovereignty!

THE WORLD BANK CASTIGATION 

Immediately before the constitution of two successive study groups  (i) U Sundarajan Committee and (ii) Kelkar Committee by the government in the year 1995 and 1996 respectively, a news item appeared in the print media, “World Bank has castigated the Indian government for failing to implement reforms in the hydrocarbon sector and asked the government to adopt policies which would attract significant levels of foreign investment.” The Kelkar (the then secretary, ministry of petroleum and natural gas) Committee, otherwise known as the “R” Group had 19 Members, which included the chairmen/managing directors of Reliance Petroleum Ltd., Tata Petrodyne, MRPL, Hindustan Oil Exploration Ltd., Bharat Shell Ltd., Essar Properties, Jindal Drilling Ltd., Essar Group etc.

It is not, therefore, surprising that the Kelkar Committee report contained policy prescriptions heavily favouring private sector entry into the hydrocarbon sector. “True to their anti-public sector and pro private sector character, the ‘R’ Group did not stop at recommending wide ranging favour to the private sector but at the same breadth prescribed various steps to dismantle the two oil producing PSUs – ONGC and OIL. The ‘R’ Group recommended to convert ONGC and OIL into non-governmental companies i.e. to bring down the government’s equity below 50 per cent”  (Report to the meeting of All India Co-ordination Committee of Oil and Petroleum Workers/CITU,  31.05.99).

Para 17.2 of  ‘R’ Group report noted, “The measures that the government needs to initiate are as follows: Bold policy initiatives relating to procedure simplification, fiscal incentives and encouragement to private participation.” It further went on to say, “Much more needs to be done to earn a greater confidence of the private sector and to attract a higher level of investment.” (para:18.0) Advocating privatisation of oil sector the Kelkar Committee has noted in para-20.0 of their report, “Now, the wheel has turned a full circle.” The underlying meaning being – oil sector took off in the private sector, actually nurtured and matured under public sector and now it is to be returned to private sector with bonus.

The Ministerial Committee constituted by the NDA government consisting of the then cabinet ministers of petroleum & natural gas, finance, external affairs and Deputy Chairman of Planning Commission and secretary, prime minister’s Office drew the document called – India, Hydrocarbon Vision – 2025. On the question of import parity pricing system and petroleum taxation and duties the Committee defined the objective of the then NDA government at para – 7.1 (b): “To balance the need to boost government revenue with need to align duties with Asia – Pacific countries and moving the prices to international levels.

ADMINISTERED PRICING MECHANISM

The ‘import parity pricing system’, was put to practice in the year 1948 through agreement between government of India and Burmah Shell and continued till November 1976. Replacing import parity system the Administered Pricing Mechanism (APM) was put to practice as per recommendation of Oil Pricing Committee during the end of 1976 and was further strengthened with modification in the year 1984. Focusing the effectiveness of APM, the PSC Report noted, “APM ensured stability of prices insulating domestic market from the volatility of prices in international markets. APM also took care of regulated returns to the oil companies at reasonable levels consistent with efficiency of operations to generate sufficient resources for encouraging growth…”.

However with the opening of the hydrocarbon sector, the foreign oil cartels and the private big businesses in the country mounted pressure on the government to introduce import parity system of pricing. The World Bank took up the cause for private profiteers. Thus the Kelkar Committee prescribed dismantling of Administered Pricing Mechanism and introduction of ‘Import Parity Basis’ for pricing crude oil and petroleum products.                                                                

Chapter 4 of the report of Kelkar Committee dealt with the issue of ‘Tariff and pricing reforms’.  Terming the APM as anti-private investment at para 39.1 the report noted, “Investors would be reluctant to commit large funds in the petroleum sector if APM continues, for the simple reason that under administered pricing regime a decision of the government can influence the profitability and market shares irrespective of the efficiency with which a company operates. Therefore, investors and oil PSUs prefer a free market set up with minimum government interference in investment and operating decisions.” (page–97). Hinting at dismantling of APM and adoption of other pro-private profiteer measures under the cover of ‘reform’, Kelkar Committee noted, “The launching of reforms is one of the fundamental preconditions for successful implementation of other important policy measures of the government, particularly the disinvestments in the ‘major’ oil sector PSUs such as ONGC and IOC.” (para:45)

The far cry of loss incurred by down stream oil PSUs trumpeted by the voice of capital and amplified by the big business controlled media is rather cunningly concocted presentation. Apart from the question of tax and duty components, the other single factor, which artificially inflates the production cost of the public sector oil companies, is the ‘import parity basis’.  If the cost of input and conversion cost of the downstream oil PSUs is calculated on actual basis without inflating by several assumed factors and costs, the profit or loss situation is bound to be different and at the same time realistic. Further the so called loss is not due to the operational inefficiency but due to wrong policies pursued by the government. Therefore the corrective measures have to come by changing the wrong policy.        

PRICING OF CRUDE OIL

Consequent upon the dismantling of the ‘Administered Pricing Mechanism’ ONGC and OIL has been allowed to charge import parity prices for the crude oil produced in India. “Components like ocean freight, insurance, customs duty, ocean loss, port dues etc. are added to the Free on Board (FOB) price of the respective marker crude in the international market to calculate the import parity price of domestic crude.” (The Parliamentary Standing Committee Report)

The two duties levied only on the public sector oil producers – ONGC and OIL - contribute in a big way in inflating the cost of indigenously produced crude oil in the country. These are cess and royalty; the former is levied by the central government and the latter is charged by the various state governments.  Cess is collected under section 15 of the Oil Industry (Development) Act, 1974 to finance the Oil Industry Development Board (OIDB) constituted in 1975 aimed at development of the Oil Industry in the country.  However, the irony is that since the constitution of that Board and up to March 31, 2005 “the central government has collected a sum of about Rs 55,966.81 crore as cess. Out of this collection, OIDB has received only Rs 902.40 crore till March, 2005.” It is rather a case of virtual fraud on the people. The money was collected to be spent for development of the oil industry, but instead it has been actually diverted and spent for altogether different purpose. Again yielding to the pressure of the private sector oil companies, under the liberalised regime of New Exploration and Licensing Policy (NELP), the cess has been abolished. Here again the main beneficiaries are the foreign and indigenous private oil companies.

 The Parliamentary Standing Committee has commented, “It is highly regrettable that large funds collected for a specific purpose i.e. to carry out oil industry developmental activities are not utilised for that purpose.”  It further went on to say, “there is no justification in levying cess if the amount generated from it is not being utilised for the sector and reiterate their earlier recommendation that a Price Stabilisation Fund should be created by using the money collected from cess on crude oil to bring in stabilisation in the prices of petroleum products. Beside, a part of the cess amount may also be utilised to provide subsidy on kerosene and LPG.”  The royalty is collected by the state governments presently at the rate of 20 per cent of the wellhead price for onshore and shallow water offshore and 10 per cent for offshore above 400 metres.

PRICING OF PETROLEUM PRODUCTS

As in the case of crude oil so also in the case petroleum products, the prices are being fixed on ‘import parity basis’ in the post Administered Pricing Mechanism (APM) era. Now the selling price is inflated on two accounts viz., for import parity – “ocean freight, insurance, customs duty, ocean loss, port charges etc to the Free on Board (FOB) price of the respective product in the international market and then further added excise duty, freight up to depots, marketing cost/margin, state specific irrecoverable levies, delivery charges from depot to retail pump outlets, sales tax/other local levies and dealers’ commission. Thus, the system artificially inflates the prices of petroleum products refined at home. The Committee strongly feel that the pricing of products on import parity basis is irrational and far removed from reality as the computations are made on assumed costs.” (Ibid).

The main reason for the exorbitant retail selling prices of petro-products is steep rate of various taxes and duties consisting of customs, excise and state level duties. The sum total works out to 132 per cent of the basic price of the products in the country against Sri Lanka 37 per cent, Thailand 24 per cent and Pakistan 30 per cent. The Parliamentary Committee has noted  “governments have a tendency to bank heavily on petroleum sector to mobilise revenues.” It may be mentioned that according to government source petroleum sector contributes 64 per cent of the gross revenue of the government through taxes and duties. It is revealing that “out of Rs 2.50 hike in petrol, the share of enhanced rates of excise duties has been Rs 2.20. Similarly in Rs 2.00 hike in diesel, the enhanced excise duty component has been Rs 1.06. The increase in prices because of global oil price is nil in case of petrol and Rs.0.70 in case of diesel. (Ibid).

The commitment of the ruling classes for the private big business houses has found glaring expression in the totally uncalled for exemption on customs duty granted by the government on the import of crude in the name of incentive for export of petroleum products. Main beneficiary of such exemption or incentive is the private sector oil companies. “Under the scheme, the finance ministry forgoes customs revenue and the exporting companies benefit immensely, both by the duty concession and the exorbitant global prices for their products. The Committee do not agree to such a concession, when huge international prices alone can take care of the profit of the exporters.” (ibid).  As per report in the print media, “Petroleum minister Mani Shankar Aiyar defended the incentive scheme, whose largest beneficiary RIL (Reliance Industries Ltd) earned Rs 1,568 crore in 2004-05.” (FE, 5.8.05)

NEED TO MOBILISE THE PEOPLE

We must organise massive campaign to create awareness among the people as to how the import parity pricing system and heavy doses of taxes and duties levied on crude oil and petroleum products produced in our country are the actual root of the present situation hotly debated in the country centering round the question of retail selling prices of petro-products. The sustainable solution must be evolved by addressing at least these two issues. The specific recommendations of the Parliamentary Standing Committee on Petroleum & Natural Gas, Fourteenth Lok Sabha, Sixth Report has inter alia said that the current ‘maladies’ in the down stream oil PSUs can be addressed by restoring the pricing norm, rationalising taxes and duties and without hiking the retail selling prices. The united power of mass of the people must mount effective pressure on the government to implement the recommendations of PSC Report. The struggles opposing any hike in the retail selling prices of petroleum products is ultimately the fight against the disastrous policies of liberalisation, globalisation and privatisation.