The following article analyses the real reasons behind the recent petrol price hike by over Rs.

7.54
in India which was the largest ever seen in recent memories. The hike, while only benefiting the
oil companies and shareholders, was met with shock across most parts of India that saw protests
everywhere and also a Bandh on 31st May that saw many parts of the country shut down. While the
opposition parties may have scored a few brownie points against the ruling Congress party, but the
role of the BJP during its reign at the Centre (1998-2004) that saw changes in the way petroleum
based products are priced is also a causative factor for the increase in fuel prices today, which
cannot be ignored. Nor can one ignore the role of the state governments in not containing the fuel
price.

Hoax of Petrol subsidy
Reasons being cited by the government and OMCs (Oil Marketing Companies) for hiking petrol prices
are huge losses incurred by these companies on account of selling petrol, diesel at lower prices,
huge stress on import of crude oil following depreciation of rupee and worsening fiscal and current
account deficit caused by government heavily subsidising these products. Armed with these
arguments the hike in fuel prices is claimed as inevitable and unavoidable. A close scrutiny of these
claims however shows a different picture.
First of all very statement of petrol being subsidised in itself is a big lie. Is the cost of production of
a litre of petrol really higher than its selling price? Below calculations reveal its production cost is
merely Rs. 40.6 (on average). Now when price of crude oil in international market has come down
from $107 in March to $90 today, cost of a litre works out to be merely Rs. 38.4, less than half of
its selling price.
Processing crude oil->
Crude Oil -> Refining -> Petrol -> Refining margin, Transportation, vendor commission = Production
cost of Petrol
(1 barrel of crude oil yields 150 litre of petrol)
Average value of dollar this year (Jan to May) = Rs. 53.34
Average price of crude oil barrel this year = $101.46
Refining, margin, transportation, commission per barrel = Rs. 672 (approx $12)*
150 litre of petrol = 101.46 53.34 + 672 = Rs. 6084
i.e. 1 litre of petrol = 6084 / 150 = Rs. 40.6
The cost depends on factors like quality of crude oil, refinery. However changes in it would not greatly
affect product price.
Thus there is absolutely no subsidy on petrol either by government or OMCs. In fact exchequer mops
up revenue worth billions from various taxes levied on petroleum products. Last year its
contribution to tax revenue was as much as Rs. 1350 billion.
Another reason cited much more often is the heavy losses incurred by OMCs. On 24th May, a day
following fuel price hike OMCs like BPCL declared its annual results soon followed by IOC on 28th
May and HPCL just a day after. Forget losses, these companies are among the highest profit making
companies in the country. Their FY12 (Jan to March 2012) Q4 profits have in fact tripled or
quadrupled from last year.
Company Q4 2011 Q4 2012 Profit growth
IOC 3905 12,670 224%
BPCL 935 3962 324%
HPCL 1123 4630 312%
*Figures in crore rupees
Depreciation of rupee and alleged strain on the cost is another flimsy claim. After reaching its peak
at $114 in August 2008, prices of crude oil have been going down. Especially in last one month they
have fallen from $104.93 (on 27th April) to $90.86 (on 25th May last week). It has offset any cost
impact caused by depreciation of rupee.
How come big figures of losses incurred by OMCs are being touted? Thats the crux of the matter.
India import crude oil and not petrol. Latter is fully refined in the country in refineries owned by
public sector OMCs while that of private OMCs is exported. However following policy change in 2002
companies baseline their prices not on production cost but on import parity. Fictitiously assuming
petrol has been imported (at Singapore market rate MOPS95) and then fictitious duties, insurance
and freight is levied on it. The difference between import parity price thus (fictitiously)
determined and actual selling cost is termed as under-recovery. For eg., if import parity price is Rs.
90 and a liter is sold at Rs. 80 then Rs. 10 is the under-recovery!
What about Working Peoples under-recoveries?
If this is model that is being followed for petroleum based products exclusively, then why not
universalise it for all other commodities? For example this year the price of cotton in international
market has been around $1 per lb making it Rs. 12,000 per quintal. But the Indian peasants are
being paid a miserable Rs. 3000 (that at times doesnt even cover production cost). Following
import parity pricing model here and without even levying fictitious duties, freight, insurance etc.,
the under-recovery turns out to be Rs. 9000 per quintal. Is government contemplating on
compensating the Indian peasants for this? While its heart bleeds at under-recoveries of profit
making companies, there is not even a drop of tear shed on the deaths of hundreds of thousands of
peasants in rural India.
And what about the under recoveries of the Indian workers? If they want to match fuel prices to
international level, why not also match their minimum wages to that level? In Britain, for eg.,
minimum wage per hour is 6.19 GBP, which is low for that country (with petrol at 1.25 GBP per
liter, one can buy 5 liter in an hours wage). With an 8 hour working day and 22 working days a
month, monthly wages turns out to be 1089 GBP translating into Rs. 92,602 (with 1GBP = Rs. 85 ).
Even if one assumes minimum wage in India at Rs. 7000 (in reality its much lesser), there is an
under-recovery of Rs. 85,000 per head!
Real Culprits
Thus in reality, the Indian working people are already being made to pay much higher than the
actual cost of petrol. With production cost of Rs. 40, OMCs are making astronomical profits and
they are crying hoarse over fictitious notions of under-recovery. It is a daylight robbery on the
nation as a whole and all of its working masses (akin to East India Company). Who are the real
culprits? Government and OMCs are only part of the answer.
One needs to dive deeper to find out the real culprits behind this crime. First of all what are OMCs?
Understanding their nature and changes to their structure in the past 2 decades holds the key to
the issue at hand. Though IOC (Indian Oil Corporation), BPCL (Bharat Petroleum Ltd) and HPCL
(Hindustan Petroleum Limited) are government enterprises, they are indeed companies listed on
stock markets and a cursory glance at its share holding pattern is an eye opener.
Company Govt Private
IOC 78.92% 21.08%
HPCL 51.11% 48.89%
BPCL 54.93% 45.07%
ONGC 69.23% 30.77%
GAIL 57.34% 42.66%
Oil India 78.43% 21.57%
With the advent of capitalist globalisation, meant that Indian economy embraced neo-liberal
reforms in 1991 . Under capitalism, the sole objective of any productive process is solely profit.
This profit is distributed amongst its shareholders. Higher the profit, higher are the returns in the
form of dividend. In accordance with this, the OMCs were part-privatised through disinvestment.
With privatisation, these companies openly embraced the naked principle of profitability. To
facilitate this, in 2002, Administrative Price Mechanism was replaced with Import Parity Pricing.
Even though government is still the major stakeholder, private investment mandates its functioning
independent of any government control. This is the precondition for the investment of private
capital into any enterprise. Keeping this mind, the government only wants to further disinvest its
stake. All talk of consultations of company executives with the government before any proposed
price hike is just to keep reaction in check.
Significant portion of the profits earned by OMCs is distributed to these private investors. It
includes mutual funds, insurance companies, domestic and foreign institutional investors and also
other government companies that have cross-invested into each other. Last week declaring its
annual results BPCL announced 1:1 bonus share to its investors and a dividend of Rs. 11 per share.
The company has 12,49,88,043 shares held by private investors implying total dividend paid to them
at Rs. 1 billion 38 crore. Below table shows dividend paid by PSU Oil companies in 2009-10 and
share of private investors in it.
Company IOC ONGC GAIL Oil India
Dividend 31.81 bn 70.58 bn 9.51 bn 8.18 bn
Private Investors 6.71 bn 21.72 bn 4.06 bn 1.76 bn
*Figures in billion rupees
Matching fuel prices to global level translates into soaring profits to the private investors. Thats
the real game. It must be noted here that ONGC is the highest dividend paying company (higher
than Reliance) in the country and 30.77% of it is awarded to private investors.
Now this is just the first part of the story; second part is even more scandalous. One can see
monopoly of public sector OMCs (IOC, HPCL, BPCL) in petrol, diesel retail market. Private sector
giants like Reliance, Essar (domestic) or BP, Shell (global) have an insignificant presence. Now it is
worth pondering upon how come such a profitable sector as oil marketing is not monopolised by
private entities while everything from Education to Health service is? As prices of fuel in India are
lower than global level, these companies do not venture into the domestic market. However Indias
petroleum retail market is obviously too big to ignore. In fact these companies desperately want
the market to be opened up and matching of prices to global level is the prerequisite so that they
dont have to compromise on their profits. It provides an investment opportunity worth hundreds of
billions and corresponding profits.
As illustrated above, it is vested interests of private investors or private capital that is at the root
cause for the hike. It is essentially these interests that unleashed treacherous and the scandalous
propaganda calling for complete deregulation of petrol and diesel prices. An army of sundry
pundits, economists and journalists on the payrolls of these corporate giants has been deployed
both nationally and internationally towards this end. The Economist, Finance Times, Wall Street
Journal along with their juniors in Indian media launched venomous attack calling for opening up
the Indian market. While we could see higher degree of aggression in global media, domestic ones
used different tactics. Consciously concealing the truth, they painted a sorrowful and a miserable
picture of government companies bleeding with heavy losses standing on the verge of doom and
thus pleading price hike to keep them afloat. Many of them extended passionate appeals calling
upon masses to swallow the bitter pill of price hike to salvage the economy or nation as a whole
and thus to stand up for the occasion.
A gloomy picture in global economy coupled with acute crisis in Eurozone has led to foreign capital
inflows to India drying up. Subsequently the economy, captive of hot speculative capital saw
growth rate plummeting from 9% to 6.9%. With Indias quarterly growth rate at just 5.3%, the Indian
government is more than ever desperate in seeking foreign investors and latter has been ably arm
twisting the former to make terms of investment yet more favourable. Succumbing to this pressure,
government has yielded by its discreet nod to fuel price hike.
The Central Role for the Indian Working Class
Under capitalism, private capital is the supreme authority and State is just an instrument to further
its interests. In modern democracy, this responsibility is vested upon ruling party. In its rule of over
past 8 years, Congress led UPA government has truly lived up to this expectations by honestly
serving the interests of private capital. Release of Nira Radia tape saw Mukesh Ambani honestly
acknowledging ruling partys contribution by commenting Congress to apani dukan hai (Congress is
our shop). However BJP staging fake protests at petrol hike is no different. It was Vajpayee led BJP
government that in 2002 dismantled Administrative Pricing Mechanism (APM) only to be replaced
with import parity pricing and current fuel hike is merely a logical outcome of this decision. In fact
the party, dominated by Brahmins, Baniyas and other upper caste trading communities, having an
outright monopoly over private capital is only the natural expression of their interests. On the
other hand, while the CPI-M, CPI rightly attack import parity pricing, but they have lost credibility
by its collusion with capitalists; Singur and Nandigram being only its visible manifestations.
The situation is alarming. Petrol prices have been hiked and deregulation of diesel is just round the
corner with domestic gas price hike in waiting. All of this is bound to wreck havoc. With persistent
calls for further disinvestment of public sector, OMCs are pouncing hard demanding more flesh and
blood. And all this so that astronomical amount of capital they have accumulated could be invested
and they could reap higher profits from it. That is the real story behind petrol price hike.
The capitalist class and State would like to seek solace in the fact that previous petrol price hikes
saw only sporadic protests and outbursts from masses without culminating into any big sustained
campaign against it. But this solace may be short-lived. Nationwide bandh on 31st May gave a
glimpse. With economy plunging into what could be a drawn out crisis, it is going to be increasingly
difficult to sustain the illusion of growth. With massive unemployment among youth and steadily
rising prices, mass discontent is brewing up. Frequently rising fuel prices are only going to fuel it to
a flash point. Worst effects of global recession saw European continent witnessing naked class
warfare on its streets and it may not be too long before this reaches India!
1Some of the policy initiatives outlined seem unexceptionable. However, the macro
assumptions and hydrological overview call for closer scrutiny, as they can well mean
misplaced priorities and have other unintended, faulty outcomes. Consider, for instance,
demand management and water-use efficiency. The paper declares that water saving in
irrigation use is of paramount importance (paragraph 6.5). But there is no attempt to focus
policy attention on the perverse and rising reliance on non-renewable, 'mined' groundwater to
feed irrigation, the single-biggest usage.
Already, the figures suggest that some 55% of pan-India irrigation needs are now met from
groundwater, that 15% of all aquifers are in 'critical condition' and further that 60% of them
would be so affected over the next couple of decades sans purposeful, proactive policy.
Nor does the paper mention of the growing paddy acreage in the north-west of late, a region
not particularly suited for intensive rice cultivation. But such cropping pattern has been
wrongly incentivised thanks to warped policy and free power, which, in turn, has led to the
water table declining and caused much groundwater depletion.
The paper merely mentions in passing that The Indian Easements Act, 1882, may have to be
modified, as it appears to give proprietary rights to a landowner when it comes to
groundwater under his land (para 2.2). The pressing need to step up water storage
infrastructure for irrigation and other needs does not quite find mention. India has a highly
seasonal pattern of rainfall, with about 50% of annual precipitation falling in just 15 days,
and 90% of all river flows taking place in barely four months.
Note also that multipurpose dams and other water systems in India can store up to only about
30 days of rainfall, a tiny fraction of that provided in both the high-income and middle-
income economies abroad. The paper does outline the need for "very small local-level
irrigation through small bunds, fields ponds, agriculture and engineering methods and
practices for watershed development" (para 6.6). However, keeping elementary topography in
mind - for a given volume, the less the depth of storage, the more the area of submergence - a
'small is beautiful' water policy may actually put more pressure on land, and have other
unintended consequences.
Hence the need to fast-forward hydroelectric projects in water-rich areas that have high
gradient like the north-east, for relatively less submergence and other gains.
The paper enunciates that recycle and reuse of water, including return flows, should be
encouraged (para 6.3). The need to adopt better irrigation practices cannot be faulted, but we
do need to keep the macro issues in the forefront for proper policy analysis. For one, there is
the need to differentiate between consumptive and nonconsumptive use in irrigation.
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The water used by standing crops and plants, as also that lost due to direct evaporation, is
termed consumptive use, as it is removed from the land phase of the hydrological cycle. The
water that percolates down from fields and canal beds is known as non-consumptive use,
recharges as it does groundwater levels.
There is certainly scope to reduce consumptive use, by policy inducing, say, sustainable
cropping patterns. Better quality, bioengineered seeds should also reduce consumptive use.
As for non-consumptive use, adopting drip irrigation methods, canal lining, etc, would help
reduce loss under the head. But note that this would also likewise reduce the possibility of
seepage and groundwater recharge. So, the net effect of the various micro irrigation methods
at the basin and sub-basin level may be quite limited indeed.
For another, the policy purpose for recycling and reducing industrial demand must also keep
the macro picture in mind. True reduction in consumptive use by industry would require
revamp and innovation of industrial processes. Merely resorting to recycle and reuse would
not affect consumptive use. It would reduce usage to the extent water is recycled, but back to
back, it would also reduce return flow to the system by the like amount. Recycle and reuse
would nevertheless seem apt to meet pollution control standards. But here again, the policy
objective ought to be safe disposal of pollutants per se (to prevent leaching to aquifers) rather
than mechanical recycle and reuse.
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