India Paying Price for Global Oil Speculation

The government has bit the bullet and the cost of living has just shot up for people all over India. But there were few options before Prime Minister Manmohan Singh. With world oil prices having reached astronomical levels, the state-run oil companies could not have continued subsidizing supplies of petroleum products to the nation.

If left unchecked, the present situation would have led to oil companies going deep into the red - and that would have been an even worse disaster for the country.

The Congress party's worries over the impact on its prospects in next year's elections are evident as the prime minister felt the need to address the nation on the reasons for hiking fuel prices. Clearly it sees doom looming on the horizon.

With inflation peaking at about eight percent per annum despite the recent round of fiscal and monetary measures taken both by the government and the Reserve Bank of India (RBI), the UPA coalition can only pray that the hike in fuel prices does not push the price index to unbearable levels.

The Left parties have taken advantage of not being part of the government to call for countrywide protests against the latest price hike but need to take a look at the high sales tax levied on oil products by its own government in West Bengal.

The Bharatiya Janata Party (BJP), on its part, has pounced on the ruling coalition's discomfort with barely concealed delight, especially after its recent triumph in the Karnataka assembly elections.

But the fact is that the BJP-led National Democratic Alliance (NDA) government earlier also raised oil product prices several times during its tenure. This is despite the fact that it presided over the dismantling of the administered pricing mechanism (leaving commodity pricing to market forces) for the petroleum sector.

But during the year before facing the polls, it clamped down and refused to allow any price hike despite the pleas of the oil companies. This created an untenable situation for the new government ultimately and forced the UPA coalition to raise prices shortly after taking over the reins of power.

In fact, had both the NDA and UPA government raised fuel prices gradually over the past few years, there may not have been a need to effect such a big hike at one go right now. Political compulsions in for the form of both central and state elections have always been the factor deterring the government of the day from taking the hard decision to raise oil product prices.

As a result, the oil companies have ended up virtually subsidising the entire economy for the last few years. A complex accounting formula was evolved to ease their financial woes in the form of subsidy by the oil producing companies like the ONGC and Oil India as well as issuing oil bonds to be redeemed at a later date. This effort at postponing the inevitable could not be resorted to this time round with world oil prices scaling peaks of $130 per barrel.

Like all other countries, India also had to take the unpleasant decision of passing on some portion of the high crude oil prices to its citizens. And that too at a time when inflation has already been creating enough worries for policy makers.

On the plus side, however, the hike in fuel prices is not likely to affect the India growth story. The increase in LPG prices will impact largely on domestic households in urban areas, which is really why the UPA decided to take the big gamble of hiking prices by as much as Rs.50 ($1.25) per cylinder. The steep rise in petrol prices will, of course, indirectly affect auto manufacturers who are already gearing up for a slowdown in sales.

But the biggest impact on the economy will be in the case of diesel, which account for 40 percent of the total consumption of petroleum products. It is used not only for mass transport of goods by road but also by the railways and also by farmers for diesel generating pump-sets.

Even so, judging by the Reserve Bank of India's forecast, it looks as if the economy is still set on course for around 8 percent growth in the current fiscal, largely due to expectations of higher agricultural growth.

Industry may be affected by the increased costs of road and rail transport but prices of industrial fuels are not controlled and therefore most companies have already factored in the higher costs. In fact, what is hurting industry more than enhanced oil prices is the tight money policy of the RBI, which could affect growth prospects in the manufacturing sector.

Agriculture, on the other hand, has now become a brighter spot in the economy with food grain production having reached record levels this year. In case the monsoon is normal, one can look forward to continued high growth especially of rice production in the current kharif season.

What is also encouraging is that flows of foreign direct investment are continuing apace despite inflationary pressures on the economy. Besides, it is recognised that fuel prices are going up globally so any hike in oil prices is not likely to affect external perceptions of the Indian economy at this stage.

The actual villains of the piece as far as oil is concerned are international speculators who have pushed world prices up to astronomical levels. No country can remain immune to the impact of such volatility and people all over the world are paying the price for such speculation.

(Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com)


More by :  Sushma Ramachandran

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