Petrol, diesel prices at record high: P Chidambaram's formula on steep rate cut is at best wishful thinking; game is tough on ground

The former finance minister P. Chidambaram’s self-righteous assertions on almost everything under the sun are not new but his tweet yesterday that the prices of petrol can be brought down easily by as much as Rs 25 per litre goes beyond this normal human frailty.

He said, the petrol prices can be cut up to Rs 25 a litre. But the government will not do so. The government will try to stoke dust in the eyes of the public by giving a Re 1 or Rs 2 cut in petrol rates per litre.

It is always easy to pontificate when you are not on the hot seat. And it is not as if the incumbent NDA government is not aware of the raging oil prices and the political consequences thereof. No less a government functionary than the Petroleum Minister Dharmendra Pradhan has gone on record several times to state that petrol prices would halve should petroleum products be brought under the Goods and Service Tax (GST) regime. BJP President Amit Shah has assured the nation that the government is seized of the matter and relief is on the way.

File photo of P Chidambaram. AFP

Chidambaram should know that states are the main culprits that are responsible for keeping fuel prices high with their steep value-added tax (VAT). The central excise duty as explained in an earlier piece is specific and not ad valorem (according to value) as is the case with state VAT. It is the states that are earning the VAT bonanza on the back of the relentless price rise. It is expected that the 21 BJP-ruled states would reduce their VAT rates on petroleum products which should have a sobering effect on the petrol bunk prices.

Saudi Arabia, which with around 13 percent of the world production is the largest producer of oil if you ignore the USA that produces more through unconventional sources like biofuels and shale gas, is witnessing hectic preparations by its oil giant Aramco for its IPO. This has fuelled further pressure on the oil market. Aramco wants crude oil prices to touch $100 a barrel so that its IPO would be a roaring success. It is reportedly sparing no efforts to ensure that the prices spiral to this level sooner than later so that it can quickly go through with its IPO.

Venezuela, another major oil producer, has been adrift insofar as its governance is concerned. In any case it is far too away from us geographically as to be of major attraction for long-term sourcing. Prime Minister Narendra Modi knows Russia is perhaps one country which we must woo assiduously. Which is why he undertook the recent visit to meet President Vladimir Putin informally. But then oil exports have become Russia’s mainstay. It would be futile to expect any concession much less charity from it. Saudi Arabia supplies oil to Pakistan at a concession but India is not in its favored list. Indeed, it never was even during the long Congress rule spanning 60 years.

Furthermore, he should know the weakening Indian rupee is adding fuel to the petroleum fire. Indian Oil Corporation (IOC) the canalizing agency for state-owned refineries has the unenviable twin back to back tasks---first buying dollars to pay for oil and then buy oil. Indeed, a costly greenback and crude oil is any finance minister’s nightmare because they feed on each other to deadly effects.

Did Chidambaram or his government ever set about on a war-footing to do anything concrete about either strengthening the dollar or augmenting our oil resources or in making efforts to break away from hydrocarbon oil dependency? To the NDA government’s credit, it must be said its recent biofuel policy is both timely and on the right track. Setting up refineries for biofuel from a range of products starting from municipal wastes to plants so as to reduce hydrocarbon oil dependency is welcome.

Source PPAC

Of course, all these would bear fruits only in the medium run or long-term when biofuel mix is close to 20 percent. And in the meanwhile, the governments have to bite the bullet and stop viewing petroleum products as milch cows taking advantage of its inelastic demand. In an election year, BJP would not like to incur the wrath of the consumers. Bringing in petroleum products may not be imminent but VAT cuts by BJP ruled states are very much on cards.

(The writer is a senior columnist and tweets @smurlidharan)