How the government is fooling the people

Everytime the price of petroleum products (Diesel, Petrol, LPG and Kerosene) are increased , the justification given by the government and the OMCs (Oil Manufacturing Companies) is the increase in the price of crude in the international market, weak rupee against dollar and the increasing subsidy on these products that is bleeding the OMCs. There is no denial of the fact that the first two reasons are justifiable for the price change, but the last reason, subsidy part, is complete misrepresentation from the governments part to support the Private OMCs like Reliance, Essar and Shell. To know this aspect better, we have to first understand the structure of oil industry in India. The raw material needed for producing petroleum products is crude oil. We all know that our country is deficient in crude oil production and 75% of our crude oil requirement is met by imports. That is why changes in the international price of crude and the changes in the dollar-rupee conversion effects the price of petroleum products. Only 25% is explored in our country and the major players are Oil and Natural Gas Corporation Ltd. (ONGC), and Oil India Ltd. (OIL) in the public sector and Reliance, Cairn Energy, Hindustan Oil Exploration Company Ltd. (HOEC), and Premier Oil in the private sector. The oil exploration companies are known as the upstream providers. The output of the upstream providers or the imported crude is used by the downstream providers. They are responsible for refining the crude oil to get petroleum products (like petrol, diesel, kerosene and LPG), marketing the final products, and development and maintenance of pipelines. The major public sector companies are Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), and Mangalore Refinery and Petroleum Ltd. (MRPL) and the major private sector players are Reliance, Essar and Shell. The last set of providers are those who maintain an interface with the consumers. They take care of the transportation and distribution of the petroleum products to the retail outlets. The major public sector companies are GAIL (India) Ltd., and IOCL and the main private sector player is Petronet India Ltd., though Reliance, Essar and Shell have also entered into the fray. The distinction between various types of providers in this industry gives us several important prices. It is very important to know and understand these prices. Let us see some of the important prices 1. Crude Oil Price This is the price at which the refiners purchase the crude oil (either domestically or imports). 2. Refinery Gate Price This is the price at which the refiners sell the petroleum product to the next stage. 3. Pre-Tax price This is the price at which the dealer gets the product. It includes the cost of marketing, distribution, storage and profit margin. 4. Retail price This is the final price paid by the consumer. This will include the dealer margin and all the taxes. So the retail price of petroleum products (like petrol, diesel, kerosene and LPG) equals the sum of the price of crude oil, refining cost, marketing, distribution & storage cost, profit of all providers and taxes & duties.

To understand better, let us take the case of a vertically integrated company. It means, a company that does everything from importing crude, refining it, storing, distributing and selling the final product. Most of the public sector OMCs like Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), are such companies. For such a company, the pre-tax price would be the sum total of price of crude oil, refining cost, marketing, distribution & storage cost and profit of all providers. If this is lower than the retail price, then there is no subsidy. Why? Because, the benefit of subsidy is enjoyed by the consumer only when the tax revenue generated by the commodity (for the government) is lower than the subsidy that the government offers to producers/sellers of that commodity. Now let us take the example of diesel in Delhi. Based on the current international market price of crude and the current dollar-rupee conversion rate, the price of crude to produce one litre of diesel will be Rs.34.34. The refinery gate prices of petroleum products are not publicly available, but based on fair estimates of the refining cost (approx Rs.5.08 per litre), we can arrive at a refinery gate price of Rs.39.42 (there could be slight variations but that will not effect the overall analysis). As per the details given by BPCL, the cost of Inland freight, Delivery, Marketing as well as margins works out to Rs.2.27. This means the dealer (petrol pump) gets diesel at Rs.41.69. The dealer commission is Rs.0.91 per litre. Adding this the pre-tax price comes to Rs.42.60. Let us tabulate the same here Cost of crude (1) Refining cost (2) Refinery gate price (3)=(1+2) Inland freight, Delivery, Marketing, margins (4) Dealer Price (5)=(3+4) Dealer commission (6) Pre-tax price (7)=(5+6) Rs.34.34 Rs. 5.08 Rs.39.42 Rs. 2.27 Rs.41.69 Rs. 0.91 Rs.42.60

The retail price of diesel in Delhi is Rs.46.95. So there is an excess of Rs.4.35 (46.95-42.60), which can go to the government as tax. But actually Central/Delhi government charges a tax of Rs.9.03 per litre of diesel. The government then shows that there is a shortfall. But the reality is that the government gets a net Rs.4.35 on the sale of every litre of diesel sold by the public sector OMCs. In that case, where is the subsidy? Why should the government and the OMCs keep publicizing the subsidy burden and the huge losses that are being incurred by the OMCs? Where is the catch in the whole process? This entire picture gets a new dimension with the introduction of some new terms like Import Parity Price and Under Recoveries. These are the Bhramastras used by the government and OMCs to mislead and misguide the people of this country. Let us see what they mean. Import Parity Price (IPP) Import parity price of a product is the price importers would pay, when the product was imported into India. In other words, it is the international market price of the product which also includes the international freight and applicable customs duty. Normally, IPP is applicable to products that are not produced in India. Since diesel and all other petroleum products are produced in India, applying IPP in oil sector has no justification.

As a result of implementation of IPP, the refinery gate price is the taken as IPP instead of cost of crude plus refining cost. This changes the complete equation of pricing of diesel. The current IPP of diesel is Rs.46.82 per litre. Using IPP as the basis of calculation, the pricing changes as follows Refinery gate price (1) Inland freight, Delivery, Marketing, margins (2) Dealer Price (3)=(1+2) Dealer commission (4) Pre-tax price (5)=(3+4) Rs.46.82 Rs. 2.27 Rs.49.09 Rs. 0.91 Rs.50.00

The retail price of diesel in Delhi is Rs.46.95. So there is a shortfall of Rs.3.05 (50.00-46.95). If you add Rs.9.03 towards taxes, the shortfall is shown as Rs.12.08 per litre of diesel. This is what the government claims as subsidy. But in reality, there is no subsidy as IPP is a fictitious price, which is not the actual cost incurred by the refiners. (See figure below)

Imported Crude oil (Rs.34.34)

Refining Cost (Rs.5.08)

Imported Diesel (Rs.45.22)

Import charges/Customs duty (Rs.1.60)

Diesel (COP) (Rs.39.42)

Import parity price (Rs.46.82)

Inland freight/Delivery/Mktg Cost/Margin (Rs. 2.27)

Dealer price (Rs.41.69) Dealer Price - IPP (Rs.49.09)

Dealer Commission (Rs.0.91)

Pre Tax Price (Rs.42.60) Pre tax price IPP (50.00)

Retail Price (Rs.46.95)

As Rs.12.08 is not an actual loss and just a notional loss, the OMCs and the government do not show it as losses in their financial statement. They have used a new term Under recovery. It is defined as the difference between the Desired Price and the Actual Selling Price. In the above example, the Desired Price would be Rs.59.03 per litre of diesel (pre-tax price plus taxes). Though in reality, the Actual Selling Price itself will give the public sector OMCs a healthy profit, Desired Price will

give them a windfall profit. Who is the beneficiary of this Desired Price concept. It is only to safe guard the interests of the private sector OMCs like Reliance, Essar and Shell. And for that everyone at the helm of affairs of decision making are very well taken care of. So, to conclude, I like to say that government can sell diesel in Delhi at Rs.46.95 per litre without losing a penny. The difference is even worse in the case of petrol, where the government has already accepted that it is deregulated. Infact, petrol is being sold at a price which is even higher than the Desired Price. Even petrol can be sold in Delhi at around Rs.50 per litre, without the government losing a penny on it. So arent we all being fooled by the same people whom we have entrusted to safeguard our interests.