Know YOUR FRIENDS AND FOES about fuel price hike

BY: sankaran srinivasan

The following article analyses the real reasons behind the recent petrol
price hike in India in the recent times The hike, while only benefiting the oil
companies and shareholders, was met with shock across most parts of
India that saw protests everywhere and also a Bandh sporadically that saw
many parts of the country shut down. While the opposition parties may
have scored a few brownie points against the ruling Congress party, but the
role of the BJP during its reign at the Centre (1998-2004) that saw changes
in the way petroleum based products are priced is also a causative factor
for the increase in fuel prices today, which cannot be ignored. Nor can one
ignore the role of the state governments in not containing the fuel price.
Hoax of Petrol subsidy
Reasons being cited by the government and OMCs (Oil Marketing
Companies) for hiking petrol prices are – huge losses incurred by these
companies on account of selling petrol, diesel at lower prices, huge stress
on import of crude oil following depreciation of rupee and worsening fiscal
and current account deficit caused by government heavily subsidising
these products. Armed with these arguments the hike in fuel prices is
claimed as inevitable and unavoidable. A close scrutiny of these claims
however shows a different picture.
First of all very statement of petrol being subsidised in itself is a big lie. Is
the cost of production of a litre of petrol really higher than its selling price?
Below calculations reveal its production cost is merely Rs. 40.6 (on
average). Now when price of crude oil in international market has come
down from $107 in March to $90 today, cost of a litre works out to be
merely Rs. 38.4, less than half of its selling price.

Processing crude oil->

Crude Oil -> Refining -> Petrol -> Refining margin, Transportation,
vendor commission = Production cost of Petrol
(1 barrel of crude oil yields 150 litre of petrol)
Average value of dollar this year (Jan to May) = Rs. 53.34
Average price of crude oil barrel this year = $101.46
Refining, margin, transportation, commission per barrel = Rs. 672
(approx $12)*
150 litre of petrol = 101.46 × 53.34 + 672 = Rs. 6084
i.e. 1 litre of petrol = 6084 / 150 = Rs. 40.6
The cost depends on factors like quality of crude oil, refinery.
However changes in it would not greatly affect product price.
Thus there is absolutely no subsidy on petrol either by government or
OMCs. In fact exchequer mops up revenue worth billions from various
taxes levied on petroleum products. Last year its contribution to tax
revenue was as much as Rs. 1350 billion.
Another reason cited much more often is the heavy losses incurred by
OMCs. On 24th May, a day following fuel price hike OMC’s like BPCL
declared its annual results soon followed by IOC on 28th May and HPCL
just a day after. Forget losses, these companies are among the highest
profit making companies in the country. Their FY12 (Jan to March 2012)
Q4 profits have in fact tripled or quadrupled from last year.

Company Q4 2011 Q4 2012 Profit growth

IOC 3905 12,670 224%
BPCL 935 3962 324%
HPCL 1123 4630 312%
*Figures in crore rupees
Depreciation of rupee and alleged strain on the cost is another flimsy claim.
After reaching its peak at $114 in August 2008, prices of crude oil have
been going down. Especially in last one month they have fallen from
$104.93 (on 27th April) to $90.86 (on 25th May last week). It has offset any
cost impact caused by depreciation of rupee.

How come big figures of losses incurred by OMCs are being touted? That’s
the crux of the matter. India import crude oil and not petrol. Latter is fully
refined in the country in refineries owned by public sector OMCs while that
of private OMCs is exported. However following policy change in 2002
companies baseline their prices not on production cost but on import parity.
Fictitiously assuming petrol has been imported (at Singapore market rate
MOPS95) and then fictitious duties, insurance and freight is levied on it.
The difference between import parity price thus (fictitiously) determined and
actual selling cost is termed as under-recovery. For eg., if import parity
price is Rs. 90 and a liter is sold at Rs. 80 then Rs. 10 is the under-
recovery!
What about Working People’s under-recoveries?

If this is model that is being followed for petroleum based products

exclusively, then why not universalise it for all other commodities? For
example this year the price of cotton in international market has been
around $1 per lb making it Rs. 12,000 per quintal. But the Indian peasants
are being paid a miserable Rs. 3000 (that at times doesn’t even cover
production cost). Following import parity pricing model here and without
even levying fictitious duties, freight, insurance etc., the under-recovery
turns out to be Rs. 9000 per quintal. Is government contemplating on
compensating the Indian peasants for this? While it’s heart bleeds at under-
recoveries of profit making companies, there is not even a drop of tear
shed on the deaths of hundreds of thousands of peasants in rural India.

And what about the under recoveries of the Indian workers? If they want to
match fuel prices to international level, why not also match their minimum
wages to that level? In Britain, for eg., minimum wage per hour is 6.19
GBP, which is low for that country (with petrol at 1.25 GBP per liter, one
can buy 5 liter in an hour’s wage). With an 8 hour working day and 22
working days a month, monthly wages turns out to be 1089 GBP translating
into Rs. 92,602 (with 1GBP = Rs. 85 ). Even if one assumes minimum
wage in India at Rs. 7000 (in reality it’s much lesser), there is an under-
recovery of Rs. 85,000 per head!
Real Culprits
Thus in reality, the Indian working people are already being made to pay
much higher than the actual cost of petrol. With production cost of Rs. 40,
OMCs are making astronomical profits and they are crying hoarse over
fictitious notions of under-recovery. It is a daylight robbery on the nation as
a whole and all of its working masses (akin to East India Company). Who
are the real culprits? Government and OMCs are only part of the answer.
One needs to dive deeper to find out the real culprits behind this crime.
First of all what are OMCs? Understanding their nature and changes to
their structure in the past 2 decades holds the key to the issue at hand.
Though IOC (Indian Oil Corporation), BPCL (Bharat Petroleum Ltd) and
HPCL (Hindustan Petroleum Limited) are government enterprises, they are
indeed companies listed on stock markets and a cursory glance at its share
holding pattern is an eye opener.

Company Govt Private

IOC 78.92% 21.08%
HPCL 51.11% 48.89%
BPCL 54.93% 45.07%
ONGC 69.23% 30.77%
GAIL 57.34% 42.66%
Oil India 78.43% 21.57%

With the advent of capitalist globalisation, meant that Indian economy

embraced neo-liberal reforms in 1991 . Under capitalism, the sole objective
of any productive process is solely profit. This profit is distributed amongst
its shareholders. Higher the profit, higher are the returns in the form of
dividend. In accordance with this, the OMC’s were part-privatised through
disinvestment.
With privatisation, these companies openly embraced the naked principle
of profitability. To facilitate this, in 2002, Administrative Price Mechanism
was replaced with Import Parity Pricing.
Even though government is still the major stakeholder, private investment
mandates its functioning independent of any government control. This is
the precondition for the investment of private capital into any enterprise.
Keeping this mind, the government only wants to further disinvest its stake.
All talk of consultations of company executives with the government before
any proposed price hike is just to keep ‘reaction’ in check.
Significant portion of the profits earned by OMCs is distributed to these
private investors. It includes mutual funds, insurance companies, domestic
and foreign institutional investors and also other government companies
that have cross-invested into each other. Last week declaring its annual
results BPCL announced 1:1 bonus share to its investors and a dividend of
Rs. 11 per share. The company has 12,49,88,043 shares held by private
investors implying total dividend paid to them at Rs. 1 billion 38 crore.
Below table shows dividend paid by PSU Oil companies in 2009-10 and
share of private investors in it.

Company IOC ONGC GAIL Oil India

Dividend 31.81 bn 70.58 bn 9.51 bn 8.18 bn
Private Investors 6.71 bn 21.72 bn 4.06 bn 1.76 bn
*Figures in billion rupees
Matching fuel prices to global level translates into soaring profits to the
private investors. That’s the real game. It must be noted here that ONGC is
the highest dividend paying company (higher than Reliance) in the country
and 30.77% of it is awarded to private investors.

Now this is just the first part of the story; second part is even more
scandalous. One can see monopoly of public sector OMCs (IOC, HPCL,
BPCL) in petrol, diesel retail market. Private sector giants like Reliance,
Essar (domestic) or BP, Shell (global) have an insignificant presence. Now
it is worth pondering upon how come such a profitable sector as oil
marketing is not monopolised by private entities while everything from
Education to Health service is?
As prices of fuel in India are lower than global level, these companies do
not venture into the domestic market. However India’s petroleum retail
market is obviously too big to ignore. In fact these companies desperately
want the market to be opened up and matching of prices to global level is
the prerequisite so that they don’t have to compromise on their profits. It
provides an investment opportunity worth hundreds of billions and
corresponding profits.

As illustrated above, it is vested interests of private investors or private

capital that is at the root cause for the hike. It is essentially these interests
that unleashed treacherous and the scandalous propaganda calling for
complete deregulation of petrol and diesel prices. An army of sundry
pundits, economists and journalists on the payrolls of these corporate
giants has been deployed both nationally and internationally towards this
end. The Economist, Finance Times, Wall Street Journal along with their
juniors in Indian media launched venomous attack calling for opening up
the Indian market.
While we could see higher degree of aggression in global media, domestic
ones used different tactics. Consciously concealing the truth, they painted a
sorrowful and a miserable picture of ‘government’ companies ‘bleeding with
heavy losses’ standing on the verge of doom and thus pleading price hike
to keep them afloat. Many of them extended passionate appeals calling
upon masses to swallow the ‘bitter pill’ of price hike to salvage the
economy or nation as a whole and thus to stand up for the occasion.
A gloomy picture in global economy coupled with acute crisis in Eurozone
has led to foreign capital inflows to India drying up. Subsequently the
economy, captive of hot speculative capital saw growth rate plummeting
from 9% to 6.9%. With India’s quarterly growth rate at just 5.3%, the Indian
government is more than ever desperate in seeking foreign investors and
latter has been ably arm twisting the former to make terms of investment
yet more favourable. Succumbing to this pressure, government has yielded
by its discreet nod to fuel price hike.
The Central Role for the Indian Working Class
Under capitalism, private capital is the supreme authority and State is just
an instrument to further its interests. In modern democracy, this
responsibility is vested upon ruling party. In its rule of over past 8 years,
Congress led UPA government has truly lived up to this expectations by
honestly serving the interests of private capital. Release of Nira Radia tape
saw Mukesh Ambani honestly acknowledging ruling party’s contribution by
commenting ‘Congress to apani dukan hai’ (Congress is our shop).
However BJP staging fake protests at petrol hike is no different. It was
Vajpayee led BJP government that in 2002 dismantled Administrative
Pricing Mechanism (APM) only to be replaced with import parity pricing and
current fuel hike is merely a logical outcome of this decision. In fact the
party, dominated by Brahmins, Baniyas and other upper caste trading
communities, having an outright monopoly over private capital is only the
natural expression of their interests. On the other hand, while the CPI-M,
CPI rightly attack import parity pricing, but they have lost credibility by its
collusion with capitalists; Singur and Nandigram being only its visible
manifestations.
The situation is alarming. Petrol prices have been hiked and deregulation of
diesel is just round the corner with domestic gas price hike in waiting. All of
this is bound to wreck havoc. With persistent calls for further disinvestment
of public sector, OMCs are pouncing hard demanding more flesh and
blood. And all this so that astronomical amount of capital they have
accumulated could be invested and they could reap higher profits from it.
That is the real story behind petrol price hike.
The capitalist class and State would like to seek solace in the fact that
previous petrol price hikes saw only sporadic protests and outbursts from
masses without culminating into any big sustained campaign against it. But
this solace may be short-lived. Nationwide bandh on 31st May gave a
glimpse. With economy plunging into what could be a drawn out crisis, it is
going to be increasingly difficult to sustain the illusion of growth.
With massive unemployment among youth and steadily rising prices, mass
discontent is brewing up. Frequently rising fuel prices are only going to fuel
it to a flash point. Worst effects of global recession saw European continent
witnessing naked class warfare on its streets and it may not be too long
before this reaches India!
WE SHOULD DEMAND:
1. Immediate scrapping of import parity pricing to be replaced with
production cost based model.
2. Re-nationalisation of public sector OMCs both upstream
(ONGC, GAIL, OIL) and downstream (IOC, BPCL, HPCL)with zero
percent private investment, under democratic worker’s control and
management.
3. Nationalisation of private Oil companies including Reliance,
Essar, Cairn Energy without any compensation, under democratic
worker’s control and management.
4. Scrapping all tax soaps extended to capitalists that creates a
big hole in public revenue (worth Rs. 5.5 lakh crore last year)
5. Building a sustainable public transport system that would
considerably cut down usage of petroleum products and related air
pollution. Expenses to be funded by levying heavy taxes on cars
and other private vehicles
6. Immediate 50% Tax on cash pile and corporate wealth to bring
down the prices and to pay for fiscal deficit
7. For full nationalisation of banks and key industries; for a
democratic workers control and management of all the resources