Another Price Hike?

THE Deve Gowda Ministry seems to be hurtling towards a pretty rough skid if the Petroleum and Natural Gas Ministry’s latest white paper on the oil pool account situation is any indication. Faced with a ballooning import bill for petroleum products, which has kept pace with rising consumption, and a tumbling crude output, the ministry has suggested a fresh price hike to meet—albeit only partly—the shortfall in the pool (the difference between the cost of petro-products and their sale prices). Worse, considering that the deficit has careened close to a hefty Rs 13,000 crore, it may be soon time to put away your wheeled essentials for the winter.

A fresh price hike, coming barely three months after the July 3 decision, is probably the hardest option before the four-month-old Government. Ironically, except for a supply control, which has been unsuccessfully tried by earlier governments, especially during the Gulf War oil crisis, it’s also the most feasible option before the ministry. There are several reasons why the ministry has been pinned into a corner this time, one of which is the ineffectiveness of the last hike.

The July revision was intended to bring down the oil pool deficit to a manageable level of Rs 3,000 crore. At that time, the import bill had already moved up, thanks to higher global prices and rupee depreciation, and there was a backlog of two years of indecision. All of which made the ministry forecast a rough end-1996-97 deficit of Rs 11,500 crore, including Rs 5,070 crore of outstanding claims of oil companies. But when political clamour forced a 50 per cent rollback of the diesel price hike, the projected deficit shot up to Rs 4,700 crore.

Worse, the price hike had no impact on the demand for petro-products, which is rising daily. And that’s not because Indians are fuel-guzzlers. Dr A. Bhattacharya, economic adviser in the ministry, estimates the actual per person demand for petro-products is only 145 kg compared to 302 kg in China, 160 kg in Vietnam and the world average of 900 kg. "The latent demand for petro-goods is a great deal higher than the actual demand," he explains. "It’s only the tip of the iceberg. We are just about able to fuel the takeoff stage of the economy."

 For the rest of the year too, the ministry doesn’t expect any drop in demand. Contrary to expectations, good monsoons may not in any way impact the energy demand, especially since power generation has been extremely poor. So, diesel consumption will continue, as it has for the last five years, at 45 per cent of total consumption of petro-products; it might even go up.

Indigenous crude output too has let the sector down. The underperformance of the Neelam field and disturbances throughout Assam plague ONGC and Oil India. Total output forecast has been scaled down by about 4.5 mt, even as crude import is expected to rise 23 per cent to around 32 mt. With oil being contracted now at $21 a barrel, compared to around $18 during the last price hike, and seasonal hardening of global prices around the corner, the import bill this year may cross $9 billion (Rs 31,500 crore), soaking up a quarter of export earnings. Even excise and customs duties have gone up in the Budget, putting a fresh burden of over Rs 1,500 crore on the sector.

While costs are shooting up in every way, money doesn’t seem to be flowing into the kitty. Outstandings with oil companies won’t come down and no payment from them is expected before next fiscal year. The ministry has asked for budget support as also a portion of the cess and oil revenues, besides readjustment of Rs 4,430 crore of interest-free deposit from the Public Accounts. But these demands must be seen in the light of the fact that funds are scarce with the central exchequer itself.

Over then to the poor personal vehicle owners, who take up a mere 6.7 per cent of the oil consumption basket. As long as diesel and kerosene, hogging 57 per cent of petro-goods supply, are not touched, price hikes will be self-defeating. Though the cost per kw of running a locomotive, pumpset or genset on diesel is much higher than on electricity, skewed price policies and poor self-sufficiency will continue to encourage "dieselisation" of the economy.