29 Dec 2015 16:09 IST

Why oil has been a boon to the government

This windfall for the Centre has embellished its accomplishments and masked its failures

In June 2014, one year after the new BJP government was sworn in, oil was at $108 a barrel. In New York this week, oil closed at below $35 for the first time in seven years. World oil has dropped by nearly 75 per cent from its peak of $145 in 2008.

To India, one of the world’s largest importers of crude products, this has been a boon of gargantuan proportions.

The Petroleum Planning and Analysis Cell (PPAC of the Ministry of Petroleum and Natural Gas), reported that India’s import bill in the 2013-14 fiscal year was $156 billion. In the current fiscal year, with eight months already over, the import bill stands at just $55 billion. At this rate, the total bill will be just $87 billion for the entire fiscal — a savings of nearly $70 billion.

How big is $70 billion? Nasscom says that IT member companies earn the country $68 billion in exports, so the savings in the oil import bill amount to India having created a whole new industry of IT sector’s size. For the country as a whole, $70 billion is valuable foreign currency staying at home to boost the size of our reserves, resulting in a more stable rupee at a time when many world currencies are struggling to hold value.

No trickle-down effect

Meanwhile, at the pump, the price of petrol and diesel has not dropped in concert with the oil markets. In Dec 2011, when oil was at $105 a barrel, the price of a litre of petrol in Delhi was about ₹70. This week, with oil at $35 a barrel, one would expect the price at the pump to have dropped 67 per cent, in sync with the global prices. So, was petrol in Delhi selling at ₹23.31 a litre?

No. It was at ₹60. The difference of ₹37 was all consumed by taxes and fees, adding valuable revenue to the government.

Each time the price of oil falls, the Modi government announces an excise duty hike to keep the price at the pump nearly the same. Five such increases have been ordered in just the last eight months alone, with the most recent increase expected to bring in an additional ₹2,500 crores in tax revenue to the exchequer.

Failing people?

This is where the Modi government is failing Indian people. Had most of the $70 billion savings in oil been passed on to those who consume it, the extra money in their pockets would have been spent on other domestic items like household necessities, appliances, cars and homes.

Lower pump prices bring prices of other items down, because transportation is a key cost component for all industries. All this would improve economic growth, bringing in even more foreign direct investment, resulting in even more growth and a more stable rupee. The multiplier effect when the private economy spends money is significantly more pronounced than when the government takes the money that rightfully belongs to the people and spends it on their behalf.

The US example

This is what is happening in the US, where pump prices are directly linked to global oil markets. In this case, the government’s role is limited to collecting a fixed gasoline tax that has not changed in the last 22 years. Two weeks ago, gasoline in Arlington, TX cost $1.57 a gallon. The same was selling for $3.30 three years ago.

US economists estimate that American consumers saved nearly $1,200 a year in their fuel bills, as a result of falling oil prices. This amount, in turn, they’re spending on other things, keeping the American economy vibrant and strong.

To be sure, there are other considerations for the Indian government to keep pump prices high — having just signed the Paris climate accord, there is an argument to be made that relaxing pump prices would result in additional consumption, creating more greenhouse gases at a time when the government has agreed to cut pollution rates. Another theory is that pegging pump prices to oil markets would wreak havoc, as consumers would not react well to price hikes, should oil prices rise.

Is the logic real?

But these theories forget an important fact about oil as a commodity: that consumer driving habits are not directly proportional to pump prices on the way down or up.

A consumer who drives 150 kilometres a week is not likely to increase his driving by 67 per cent by taking needless trips simply because pump prices fall 67 per cent. He factors in other constraints as well , such as time, the sorry condition of roads, traffic and other marginal expenses he will incur (like making purchases) when he plans additional trips.

On the other hand, when pump prices rise 67 per cent, he doesn’t cut his driving by 67 per cent; he still has to drive the required minimum distance each day.

Unintended windfall

While no one can predict the price of oil in the future, the consensus is that oil prices will continue to stay low for years to come. Supply is increasing as countries like Iran begin to pump even more and the US begins to export oil, after a 40-year ban was lifted this week. The OPEC countries said they will continue to pump at record rates as well.

Meanwhile, demand continues to be flat or even diminished as major economic regions (Europe, China and Japan) slow down.

Indian consumers are smart enough to understand that if pump prices are linked to world oil markets, they will bear the risk of price fluctuations, just as US consumers do. Oil has been a huge unintended windfall for the Modi government: so big that its effects have embellished government’s accomplishments and masked its failures.

The way things look, this situation is likely to continue for the foreseeable future as well.

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