The
July 5 bandh against the recent hike in the
administered prices of petroleum products did shut much
of the country down. This may or may not shake UPA II
out of its indifference to political and parliamentary
disagreement on the correctness of its manifestly elitist
economic strategy that favours industry, finance and
the well-to-do over the common person. But it does seem
to mark a turning point in the six-year long innings
of the UPA in government. The claim that the UPA and
its economist Prime Minster had managed to build a consensus
around the market-friendly, pro-business, neoliberal
strategy it pursues has been challenged not just by
the political opposition to it, but by the mass support
that opposition has received as reflected in the success
of the bandh.
The fact that there is no such consensus, but only an
artificial one constructed by a governmental propaganda
machinery and an elitist media, is corroborated by many
developments. For example, the myth that there is no
opposition to inflation partly because its effects are
no more so damaging (presumably because Indians on average
are richer now and can ''afford'' it) and partly because
some inflation is recognized as the unavoidable outcome
of adjustments needed to promote growth, has been exposed
for what it is: a myth. Political circumstances may
have delayed strong public expression of anger, but
such anger was clearly there and is now visible on the
streets. It has clearly not been diluted by the periodic
claims of apologists labelled as economists (non-resident,
imported or locally cloned) that if we wait a few months
inflation would just go away.
Second, the opposition is now strong enough to dismiss
the malicious propaganda used to delegitimize dissent
against a callous set of policies that penalise the
poor for no reason other than the desire to reward the
insatiable appetites of India's rich. This propaganda
of delegitimization has many elements. That such dissent
is merely the opportunistic coming together of Left
and Right for political gain and not because of conviction
about the correctness of their demands. That responding
to such demands would drive the exchequer bankrupt.
That the opposition to such policies, through a bandh
for example, results in losses totalling thousands of
crores of rupees, as ''established'' by spurious estimates
purveyed by organisations such as the CII that represent
the interests that benefit from market-driven pricing.
Finally, the lack of consensus was reflected in the
official advertising campaign against the bandh
launched by the Ministry of Petroleum and Natural Gas.
Recognising that opposition to the petroleum price hike
was receiving public support, the Ministry decided to
drop any pretence that there was a consensus and chose
instead to manufacture one. Poorly designed advertisements
occupying substantial newspaper space (at a cost of
course), asserted that the price hike was a ''small
price'' to be paid today to ''reap big benefits tomorrow''.
Besides being opaque on what those benefits were and
how they were to be derived from a price hike, the ads
gratuitously declared that the bandh was ''not
a solution''. It was another matter that none was arguing
that the bandh was a solution to anything other
than governmental intransigence. In any case, it was
unclear which problem the Ministry had in mind. In the
event, the ads served no other purpose than that of
paying off some newspapers that were using their editorial
columns to justify the price hike and attack all opposition
to it.
The opposition to the petrol price hike was as strong
as it was because the hike came in the midst of a prolonged
inflationary crisis that the government had failed to
control. Coming when it did it also seemed to signal
that the government could not care less about the inflation
and its effects on the poor majority in this country
that earns money incomes that are not indexed to inflation,
and are therefore experiencing a decline in real (inflation-adjusted)
incomes from their already abysmally low levels.
Consider, for example, the aggregate rate of inflation
as reflected by the Wholesale Price Index (WPI). The
WPI figures for May reflected three worrying trends.
First, for the fifth month in a row, the aggregate annual
rate of inflation as reflected in the month-on-month
increase in the WPI had been near or well above double-digit
levels. The figures for May put inflation at 10.2 per
cent over the year. Second, this inflationary surge
was particularly sharp in the case of some essential
commodities, as a result of which the prices of food
articles as a group had risen by 16.5 per cent and of
food grain by close to 10 per cent. Though food inflation
had declined to 12.9 per cent during the week ended
June 19, the figure was still high and reflected more
a base effect rather than a slowing of the extent of
price increase. Finally, there were clear signs that
what was largely an inflation in food prices was being
generalized with fuel prices rising by 13 per cent and
manufactured goods prices by 6-7 per cent.
As has always been the case, the inflation in retail
prices has been much greater than at the wholesale level.
The retail prices collated by the Ministry of Consumer
Affairs, Food and Public Distribution indicate that
the average of retail prices across centres all over
the country had as at the beginning of July increased
over the previous two years by 19 per cent in the case
of rice and wheat, 58 per cent in the case of tur dal,
71 per cent in the case of urad dal, 113.5 per cent
in the case of moong dal, 73 per cent in the case of
sugar and 32 per cent each in the case of potatoes and
onion. By any count this is an astounding rate of inflation,
and a similar situation prevails in the case of vegetables
that are an important component in the food consumption
basket of the common person.
The government's periodic response has been that while
inflation is a matter for concern, the trend is likely
to reverse itself. In his inaugural address at a conference
of Chief Ministers on prices of essential commodities
held in February this year, Prime Minister Manmohan
Singh said that the worst was over on the food inflation
front and expressed confidence that the Centre would
soon be able to stabilise food prices. It could not
in practice because it did little and ignored important
structural influences on the pace of price increase
in the current conjuncture. One is the long-term neglect
of agriculture which has affected the level and pattern
of agricultural production to an extent where supply-side
constraints are leading to inflation every time growth
picks up. The sudden and sharp hike in the support prices
for pulses announced recently is an acknowledgement
of this problem by the government. However, given the
likely lag in output responses, the immediate fallout
of that price increase could be an aggravation of inflationary
trends.
A second structural influence is the effect the government's
policy of reducing subsidies, raising administered prices
and dismantling price controls has on the costs of production.
Finally, inflation is high and persistent despite expectations
of a normal or good monsoon because the decision to
give private trade a greater role in the markets for
essentials and permit futures trading in some essential
commodities has provided the basis for a new bout of
speculation which the government seems unable or unwilling
to control.
While there is some consensus on the role of speculation
in driving inflation, official statements ignore the
importance of liberalised marketing arrangements and
liberalised futures trading in ensuring that speculative
expectations of a rise in prices are realised. Moreover,
with its emphasis on subsidy reduction and targeting
of food distributed through the public distribution
system, the Centre has paid little attention to enhancing
the spread and penetration of the PDS, making it a less
potent instrument to combat speculation. In fact, many
states have complained that they have not been allocated
adequate supplies to cater to rising demand, undermining
the role of the PDS as a safeguard against inflation
in open market prices.
As opposed to focusing on these matters, the UPA government
has sought to divert attention and induce a sense of
complacency about future price trends. Besides periodically
declaring that inflation would subside in due course,
the government has chosen to identify the inflation
that has been with us for the past few months as being
the collateral fallout of policies and developments
elsewhere in the domestic and world economy. For example,
at the Chief Ministers' conference referred to above,
among the reasons reportedly cited for the price rise
were increases in the minimum support price for farm
produce instituted to help the farming community, increases
in international prices, increases in demand ''due to
the increase in purchasing power'' resulting from higher
growth, excess liquidity in the system, ''inefficiencies''
in marketing of farm produce and the high cost of intermediation.
Many of the factors are either out of the Centre's control
or otherwise positive economic outcomes that cannot
be countered. This amounted to an implicit declaration
that food price inflation of some intensity is inevitable.
Moreover, in yet another indicator of it callousness,
the Centre sought to transfer the blame for inflation
to the states. At the Chief Ministers' conference the
Prime Minister, who had earlier argued that the states
were not doing enough to deal with speculation, attributed
the wide gap between farm gate and retail prices partly
to the proliferation of State and local taxes, cesses
and levies. Claiming that taxes on food items added
an additional cost burden of as much as 10-15 per cent
at the retail level, he implicitly suggested that the
states should forego revenues to neutralise some of
the price increase. Besides this, he made a case for
enhancing competition at the retail level by opening
up the retail trade, though the evidence elsewhere is
that this merely increases concentration at the retail
level and widens rather than reduces trade margins.
Not surprisingly, the Prime Minister's remarks, which
were hailed by senior executives of many domestic retail
majors such as the Future Group, were seen as a signal
of the Government's intent to allow a larger role for
foreign companies in India's retail industry.
This was being done when, even in India, the evidence
suggested that allowing corporate (both domestic and
foreign companies) to enter the market for grains and
other food items has led to some increase in concentration
of distribution. This has contributed to the widening
of the gap between farm gate and wholesale prices and
the gap between wholesale and retail prices. As a result
farmers have benefited less from periods of high prices
even as consumers suffered, because the benefits are
garnered by middlemen. Whether it is agricultural, energy
or industrial price inflation, a few corporate and trading
interests seem to be the principal beneficiaries.
It is in this context that the recent decision to hike
petroleum product prices and the opposition it has generated
need to be assessed. The immediate and near-term impact
of the oil price decisions would be an aggravation of
inflationary trends that currently burden the common
person. Petroleum products are consumed in some measure
by all. Given the fact that these products are universal
intermediates, entering into the costs of production
of a number of goods and services, the cascading effects
of the price hike on the costs and prices of a range
of commodities is likely to be significant. With prices
of essentials already on the rise, the move threatens
to make inflation the country's principal economic problem.
It follows, therefore, that this is the worst time for
hikes in and the decontrol of the prices of petroleum
products.
The government claims that this was unavoidable because
of the ''losses'' being suffered by the oil marketing
companies (OMCs). When the domestic prices of oil products
are controlled but the price of imported oil is rising,
oil marketing companies receive from the consumer less
than what it costs them to acquire the products they
distribute. This leads to what are termed ''under-recoveries'',
which would affect the accounts of the oil marketing
companies (Indian Oil Corporation, Bharat Petroleum
Corporation, Hindustan Petroleum Corporation and IBP)
that obtain their supplies of petrol and diesel from
the refineries at prices that equal their import price
inclusive of customs duty. According to estimates, if
retail prices had not been raised under-recoveries by
the oil marketing companies would have exceeded Rs.
70,000 crores in the current fiscal year. Since this
is unsustainable, it is argued, the hike in prices and
a shift out of a controlled pricing regime is unavoidable.
The government's argument is by no means water-tight.
While under-recoveries are a reality, they do not turn
oil refining and marketing firms into loss-making enterprises,
because those firms deliver a range of products and
services, the prices of all of which are not controlled.
If, for example, even if we consider the profit after
taxes of the most important oil companies over the last
ten years, they have remained positive in all years
and quite substantially so in some. Under-recoveries
are notional losses that only lower book profits relative
to some benchmark. Thus, there is little danger that
the industry would be bankrupted even if prices were
kept at their earlier levels.
There is, of course, the question of fairness. Since
there are many players involved in the industry there
is no reason why under-recoveries should affect only
the books of the oil marketing companies. The returns
on net worth earned by the oil marketing companies are
far more volatile and vulnerable than that garnered
by the upstream oil companies (ONGC, OIL and GAIL).
The burden should be shared by the latter, which receive
prices that more than compensate for costs; by the central
government which garners revenues in the form of customs
duties and excise duties (besides dividends from the
oil majors); and by the state governments which benefit
from sales taxes. This requires, for example, the oil
refineries to offer discounts when selling products
to the OMCs and for the government to reduce the taxes
it levies on oil products in order to absorb part of
the under-recovery.
The controversial question as to how the burden should
be shared was analysed by a committee headed by C. Rangarajan
appointed to examine the issue. The committee spent
much of its energies on the different stages through
which imported and domestic crude is converted into
petroleum products supplied to the consumer, and the
cost escalation that arises as the raw material passes
through these stages. The numbers suggested that there
was an adequate buffer to shield domestic consumers
from the effects of increases in international prices,
so long as segments that can afford to take a cut in
petroleum-related revenues because they have alternative
sources of resource mobilisation are willing to accept
such a reduction.
Thus, if at all there is an argument for price deregulation
it can only be that it is for some reason wrong to expect
the oil companies and the government to bear the burden
of the irrational fluctuations in the global prices
of oil. That argument too is difficult to justify. When
the industry was wholly in the public sector, the prices
of oil products were treated as one set of instruments
in the tax-cum-subsidy regime of the government. Any
losses suffered by the industry or any shortfall in
funds required for investment as a result of price regulation
were to be met from resources mobilised through progressive
taxes rather than from regressive price increases. The
government should have adopted a similar approach in
the current situation and focused on rules that can
and have been devised.
It needs to be noted here that oil prices have not been
held constant in recent history. Rather the average
annual increase in prices over the last two decades
indicate that the increase has been much higher in the
case of retail prices of petrol, for example, than in
the wholesale price index for all commodities. The common
person has indeed borne some of the burden of volatile
oil prices.
The question remains as to why the government is adopting
policies that transfer most of the burden onto the aam
aadmi and aggravate inflation. Ideological commitment
to neoliberal policies and misplaced belief in their
ability to put India on the ''world stage'' may be playing
a role. But, more importantly, the government's moves
or lack of them seem intended to favour corporate interests
of various kinds. Hopefully, the opposition would be
able to drive home the point that the people are not
willing to accept this kind of cynical extraction of
surpluses for profit.
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