New Delhi, Dec 16 (IANS): Life behaves in many strange manners and markets behave in an even stranger way.
There was a time when fuel at the pumps was available at a price cheaper than what it cost to manufacture. People appreciated that the government of the day was considerate in doing so. The government of the day decided to subsidise the cost of production and give the common man fuel at a lower price.
Strange as it may sound, it happened during UPA 1 and UPA 2. We will discuss the same in some detail.
The government issued oil bonds to the oil marketing companies for the amount that they provided as a subsidy. These bonds had a coupon rate and could be discounted from banks so that the OMCs did not take a hit.
Further their working capital cycle was getting hit making big holes in their balance sheets. The government was the facilitator and issued the bonds without actually taking any subsidy amount on the balance sheet of the government.
Yet everybody was happy with the system as the fuel price would be lower than it should have been. Even in those days a freebie was a freebie and always welcome.
What was the catch? It was like you were going to a restaurant and eating to your heart’s content under the impression that you were not paying for it. As you were leaving, a bill was presented to you. When you asked what it was about, you were politely told that this was for what your father ate.
The system was you pay less today and subsequently you pay more with interest and the government takes the credit for the discount or subsidy.
The NDA removed this anomaly and used the falling crude oil prices to their advantage to generate surplus in the pool account and partially fund the redemption of the pending oil bonds.
When the Russia-Ukraine war happened they actually helped sanction-hit Russia and procured cheaper crude oil through the land and sea route to source crude at significantly lower prices. This helped both Russia and India. The good relations that India has with Russia was put to good issue and the deals were done via the rupee trade route.
Circumventing the sanctions, the price limits and the banking restrictions as well, were taken care of. Similarly, we have had transactions with Iran when there were sanctions imposed against them as well.
On a different note, the success of the UPI system which has been developed by NPCI and is now being marketed aggressively to many countries, is a great alternative to a national payment mechanism in direct competition to Visa and Mastercard.
The success of the same in the country in such a large way has brought about the awareness globally of what a homegrown payment mechanism can do to an economy. The way the US had put brakes on Russia with sanctions would not have happened if Russia had developed such a system. This line is being marketed on a war footing now and India has tasted success in the UAE most recently.
The advent of the ‘Rupay’ card has put pressure on the likes of Visa and Mastercard. Lastly, the number of transactions being handled through UPI and by NPCI are the largest on any platform globally already.
Coming back to fuel, India has moved to a daily fuel change policy where prices vary on a daily basis. They are directly linked to crude prices and the exchange rate.
This is in sharp contrast to forthrightly price changes that were the norm earlier. Now, it’s only when we have state elections in the country that for a brief period, pump prices remain unchanged in a rising environment so that it gives an impression that the government is pro people.
India has come a long way on its policy for fossil fuels. We need to import crude oil but are self-sufficient in production of fuels whether it be diesel or petrol. We do have surplus refining capacity and are known to export fuels whenever the prices are attractive. We have the world’s largest single location refinery in Jamnagar built by Reliance.
On the taxation front, crude oil and fuels are a central subject and part of the central government duty structure. This sector does not attract GST as yet. The Centre has in a judicious manner tinkered with excise duty, cess and even abnormal profits tax from time to time to take care of its resources.
While people may argue that we have expensive fuel in India, the number of cars being manufactured and sold do not show any signs of abating. The road infrastructure is improving rapidly. The number of roads is rising, yet the traffic seems never ending simply because the vehicle population rises at a steep angle which puts pressure on our roads in a never-ending manner.
The government has managed the prices of fuel considering the demand, our foreign exchange and the fact that mobility is the need of the hour. Even in difficult times the circuitous route from Russia to India was a welcome step. Further the abolition of the oil bonds scheme and the subsidies that were being done was much more than a welcome step.
In conclusion, the effective steps taken to manage the crude oil and the rise in prices that affect us have been managed decently as of now. There would always be complaints on some ground or the other, but we are better off now than earlier.
(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)