India Should Not Roll Back Fuel Price Hikes
The Union Government issued Rs 22,000 crores (US$ 4.4 billion) in oil bonds on behalf of the three oil marketing companies at the start of November, largely to compensate them for selling fuel at below production and acquisition costs.
The bonds have a coupon rate of 8.2 per cent and will be redeemable in 2013, so have a 5 year maturity. The bonds do not carry the status of statutory liquidity ratio (SLR), the ratio of assets banks by law must hold in government securities or debt. Which means banks have no legal obligation to hold the debt and may be less inclined to do so, preferring instead to make higher yielding loans to other companies. SLR currently stands at 24 per cent. The bonds are eligible for repo transactions however.
Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation will now be able to use these oil bonds as security with the Reserve Bank of India which will in return give these companies an equivalent number of dollars. The oil companies require dollars to buy crude oil on the international markets for their refineries. The marketing firms spend close to $6 billion or Rs 30,000 core every month buying crude oil.
The proceeds will be split amongst all three marketing firms, with Indian Oil receiving Rs 11,975.51 crore or US$ 2.39 billion, Hindustan Petroleum taking Rs 5,330.76 crore or US$ 1.06 billion and Bharat Petroleum getting Rs 4,693.73 crore or US$ 938 million.
The Indian Parliament in October approved the issuing of oil bonds worth nearly Rs 66,000 crore or US$13.2 billion. The remaining Rs 44,000 crore or US$ 8.8 billion worth of bonds will be issued at a later date.
The oil marketing companies sell fuel at below production costs for which they are partially compensated by the government in the form of oil bonds. The Government of India last financial year issued oil bonds worth around Rs 34,000 crore or US$ 20 billion. In this financial year over Rs 70,000 crore or US$ 14 billion worth of oil bonds are likely to be issued. This amount pales in comparison to the annual import bill of US$ 72 billion or Rs 360,000 crore.
There have been many voices recently calling for the Indian government to roll back price hikes in fuel that were implemented when the price of crude traded as high as US$ 147 a barrel. There is temptation on the part of the Congress government to give in to such demands with an election imminent. The fact of the matter is the Indian energy bill has been subsidised for far too long creating demand for the commodity that would not exist were prices adequately reflecting their true market cost. Indian subsidies to some degree, even if it is only very small had the effect of pushing world energy prices up further, resulting in our own import bill ballooning.
The hard decision of raising prices has already been taken, the common man has gotten used to higher prices and though the fall in energy prices has been mitigated to a large degree by the Rupee falling against the US dollar. Meaning India has not benefited as much from a two thirds fall in the dollar cost of crude as it would have liked too, any gain in the rupee from this point on means our import bill falls.
India must not lose the opportunity to reduce the amount of subsidies she pays to oil marketing companies because they are forced to sell for the most at a loss. It is an inefficiency of the economy and makes the country less competitive. Rolling back price hikes would be populist, and the real purpose it would serve, would be to ensure that politicians gain re election rather than offer relief to the common man.
The Congress government really should think twice before rolling back price hikes even if it does seem cruel to the common man who struggles. The Government must think about the future of the country, and the economy needs to become more efficient, reducing the subsidies paid to industries which actually contribute to government revenues in most other countries. More importantly India should hedge the risk that prices return to their previous levels by maintaining fuel prices at their current levels.
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