Fuel for serious thought

After food security, energy security is India’s biggest concern. It is also one of China’s major concerns. At a time when there is a surge of optimism in the United States about new findings of crude oil, shale gas/oil, as well as natural gas that are expected to soften energy prices and make America a significant net exporter of energy by 2020, the main way the Indian government believes it can alleviate the energy shortage in this country is by hiking prices of electricity and petroleum products and making them market-driven, thereby adding to the already-unbearable inflationary burden on the aam aadmi.

The difficult decisions that need to be taken on acquiring land (for, among other things, coal mines and thermal power plants) in a humane manner, checking abuse of subsidies on electricity and petroleum products by improving governance, formulating a more integrated energy policy by encouraging use of renewable energy and also by taxing rich users of diesel cars — all of which are intimately linked to the energy crisis in India — have unfortunately been placed on the back-burner.
Imports meet roughly one-third of India’s total requirements of all kinds of energy. Over 80 per cent of the country’s total requirement of crude oil is currently imported, while around one-sixth (around 16 per cent) of coal consumed is also being imported. The fall in the value of the rupee vis-à-vis the US dollar in recent times has added to the strains on the economy.
It is well known that coal-based thermal power is critical to India’s energy security. Land acquisition and environment clearances pose major problems for public and private sector companies generating power as well as mining coal. Heated debates are raging in the country — including within different ministries of the government — on a range of issues relating to land acquisition and the modalities of rehabilitation of “project affected persons”.
This is what Prime Minister Manmohan Singh said on December 15 at the annual general meeting of the association that represents many of the biggest businessmen in the country, the Federation of Indian Chambers of Commerce and Industry: “Underpricing of energy, particularly electricity and petroleum products, has greatly affected the resources available for investment in infrastructure and social development.”
He added that subsidies on petroleum products (diesel, liquefied petroleum gas and kerosene) was more than what the government spent on health and education put together. “Our action in correcting distortions in energy pricing and reducing diesel and LPG subsidies was aimed at achieving (fiscal consolidation)…”
What the Prime Minister implies, though not in so many words, is that the government has to continue to hike energy prices. In September, a political storm ensued after diesel prices were hiked by `5 per litre after a gap of 14 months. In 2011-12, sales of diesel cars had gone up by 35 per cent to comprise 47 per cent of the total market for passenger vehicles. This proportion rose to 54 per cent in April-June and 57 per cent in July-September 2012. Government data indicates that passenger vehicles account for around 10 per cent of total diesel consumption, trucks around 40 per cent and buses around 10 per cent. A big chunk of the remaining 40 per cent is used by the railways, for pumping water for agriculture and for generating electricity.
Diesel accounts for roughly 60 per cent of the revenue loss on sales of the three subsidised petroleum products diesel, kerosene and cooking gas. Under-recoveries of oil companies on diesel sales are roughly `10 a litre. In 2011-12, total under-recoveries were `1,38,541 crore (of which under-recoveries on diesel sales were `81,192 crore). Because of pressure from an influential lobby of carmakers (notably the Tata and Mahindra groups followed by Maruti-Suzuki and Toyota), the government is steadfastly refusing to hike excise duties on diesel cars and impose an annual tax on their use, not only to raise revenues but also to encourage the purchase of petrol cars.
Whereas the government deregulated petrol prices in 2010, prices of diesel (as well as kerosene and liquefied petroleum gas) continue to be administered. Neo-liberal hawks (including many in the government), think the best way ahead would be to not allow under-recoveries of public sector oil refining and marketing companies to go up by decontrolling diesel prices. This would also contain the government’s deficit. The burden thus falls on consumers who have to pay higher prices.
The implications of this strategy are clear. Diesel is the largest selling petroleum product in India in terms of tonnage as well as value, accounting for roughly 40 per cent of the total value and around 60 per cent of the total volume of all petroleum products sold. Higher diesel prices have a cascading impact on the prices of a very wide range of articles of mass consumption, especially food items. Petrol, unlike diesel, is consumed not only by the rich for personalised transport but also by middle-class users of two-wheelers. The same is not true of LPG (which is used by middle classes and also by sections of the poor) and kerosene, which is supposed to be used by the poor for cooking and lighting but which is illegally diverted in large quantities (to adulterate petrol and diesel) and smuggled out of India.
What the government does not publicise is that total taxes on petrol are more than half its selling price and those on diesel over 30 per cent of the price paid by a consumer. Excise duties on petroleum products contribute over 40 per cent of the Indian government’s total excise collections. Importantly, customs and excise duties on crude oil and petroleum products are ad valorem or a percentage of value, which implies that tax revenues go up as prices rise, which is good for the government but bad for the consumer.
The government seems more eager to protect the health of the fisc (by not cutting taxes on petroleum products) and ensuring the well-being of automobile manufacturers (by not discouraging the use of diesel cars), not the health of the aam aadmi by reducing inflation.

The writer is an educator and commentator