Friday, June 06, 2008

Oil Price Humbug

Once again, to my utter dismay, the Comrades are right. Albeit unknowingly. Petro-products in India are highly subsidised. Starting with this assumption all kinds of nonsense is being bandied about by all kinds of people ranging from BBC and CNN to the Bush-Condi comedy circus to the international financial press giants to the Indian pink sheets and the Indian business channels and their invited experts - people who should know better. Even the Government press releases justifying the recent price increases start here. This assumption which leads to calls for letting market forces operate freely and cries for curbing consumption is simply untrue. Petrol, to take the prime example, sells in the U.S. currently around $ 4 per gallon or Rs. 42 per litre. In India the average price at the selling point is Rs. 55 per litre or $ 5.20 per gallon. What then is going on? Complete distortion of the cost structure by ham-handed taxation at multiple points combined with inefficient procurement-conversion-delivery chain management. American oil companies deliver petrol, or gas as they call it, to the consumers at 30% less and make enormous profits. In India a few politicians, government economists and public sector honchos know better. As a result the consumer pays a higher price and the oil companies make losses! Finance ministers, at the Centre and States, happily take credit for the bonanza delivered by ad valorem duties and taxes but talk of revenue sacrifice when asked to reduce the same. Utter nonsense. Whether petrol in India should be more expensive than it is in the U.S., and if so how much more, is a separate question but let us face facts and stop trying to fool ourselves. There is no subsidy.