India Intelligence Report

   Commies Say No to Oil Price Hike


Buoyed by the exit polls that predicted an ultra-left victory in state elections, the communists vowed to stop the Government from hiking oil prices that could force oil companies to absorb a loss of over USD 16.5 billion or $13.5 billion for the exchequer. Apparently, their victories in Kerala, West Bengal, and an alliance-driven victory in Tamil Nadu has encouraged them to oppose policies. In a preliminary meeting with the Petroleum and Oil Minister Murli Deora, they argued that what is required is rationalization of taxes and not increased prices.

The Government imposes a cess on oil worth USD 13.5 billion a year and a Central and State taxes of USD 28.3 billion. The communists think that instead of raising the oil prices in relation to world oil prices, the Government should forego these revenue streams to spare “the common man.” They think that an increased price of oil, petrol, and diesel will cause inflation to rise and affect the common man. 

They are right to think that increased prices will cause inflation and affect the common man. However, so will the lack of price adjustment and this is where the communists miss the big picture. A lack of revenue by the Government will mean a larger fiscal deficit, which means a depreciation of the Rupee against world currencies. This will require adjustments through additional revenue from loans, broadening and deepening the tax base, or Disinvestment.

The Government cannot borrow any more with seriously damaging growth prospects of the economy as it is already over-leveraged. Recently, Standard & Poor’s and Moody’s bettered the rating on India citing improvements in debt situation and lower interests. If the Government borrows any more to overcome deficit, it will result in these rating agencies downgrading the economy squandering gains and making it more expensive for corporations to borrow money. Capital starved Indian companies already absorb 2/3rd
of the all Asian (without Japan) capital through their foreign currency convertible bonds or 10% of the
world’s bond investment to fund their expansions, growth, and mergers. With lower ratings, the cost of
borrowing for the companies will increase compromising their earnings leading to lower taxes, growth,
and losses in the stock market. More importantly, slowing down corporate growth result in a large
opportunity cost for the nation as it struggles to compete with other emerging markets such as China and

The Government could consider deepening the tax base by raising the tax rate. However, the only segment that is really taxed is the salaried class and barring Europe is one of the highest in the world but minus the services that developed economies offer. Alternatively, it could broaden the tax base but with more than half the economy running below the radar, lack of monitoring mechanisms, lackadaisical enforcement of tax rules, bureaucratic corruption, and selective application of the law have affected even existing tax collection. Hence, pinning the hopes on raising taxes is not a great option.

Disinvestment is the other route, which could help the nation tide over the current oil price crisis but also reduce bureaucracy, increase competitiveness, and make available billions of dollars for social expenditure. However, the communists do not want the Government to disinvest either saying that these companies belong to the nation. While this is true, does it not follow that the monies invested in these companies could also result in good profits for the benefit of the nation?

The same debate happened earlier, which caused huge losses to oil companies. Oil and Natural Gas Corporation (ONGC) alone lost USD 2.6 billion last year and compromised its ability to bid for oil stakes abroad and losing heavily to Chinese China National Offshore Oil Corporation (CNOOC). If prices are not adjusted, ONGC may lose a larger amount this time, Indian Oil Corporation USD 8.2 billion, Hindustan Petroleum Corporation Limited USD 4.1 billion, Bharat Petroleum Corporation Limited USD 4.4 billion, and Indo-Burma Petroleum Limited USD 1.8 billion.

Now that the elections are over, must the country go through this politically driven charade? While the communists have openly said that they do not want to bring down the Government, as they are afraid that a new election will bring the Bharatiya Janata Party (BJP) to power. However, they can make it very inconvenient for the coalition to function driving it to replace the forward-looking Prime Minister with a retrograde candidate. That is a cost the nation cannot bear.

This is an issue where the BJP needs to support the Government on its oil pricing policy. Gloating over the inconvenience of the Government will lead to serious setbacks to the Indian economy and progress towards development.