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Fuel for thought

I find an interesting contrast. The average American adjusts with ease and equanimity to wild fluctuations in the price of gasoline. The average Indian finds it difficult.

Petrol prices in the US have always been lower than most countries in Asia and Europe. When crude prices shot up a few years ago to more than $ 4 per American gallon (3.75 litres), there was a lot of grumbling, but there was also resignation to the fact that prices were market driven.  So people adjusted their lifestyles – they moved away from larger sports utility vehicles (SUVs) to smaller cars; hybrid cars saw massive increase in sales, people cut back on driving vacations, etc.

Since 2014, when crude prices crashed, petrol prices dropped to as low as $ 1.35 per gallon; with exchange rate of Rs 68 per US dollar. This meant that petrol was available for just around Rs 25 per litre through 2014 and 2015. People went back to buying larger vehicles, and hybrid sales growth slowed. In my current visit to the US, I notice the price shooting up to $ 2.75 per gallon. This translates to Rs 49 per litre! The average American has taken this doubling of price in a year in his stride.

In India the contrast was stark. Successive governments at the Centre have been struggling to cope with the huge increase in crude prices. The Vajpayee government attempted to move away from the administered price for petroleum products in 2002. The then Petroleum Minister, Ram Naik, told journalists at the Economic Editors Conference that the regime of controls would be over. On that promise, Reliance Industries, Essar, Shell and ONGC entered petroleum marketing through hundreds of retail outlets. The three private companies also set up a good number of petrol/diesel dispensing stations across the country. These, in fact, were different from the dilapidated and often depressing outlets of the public sector oil marketing companies of Indian Oil, Hindustan Petroleum and Bharat Petroleum. In fact, the glittering and clean appearances of the new entrants triggered the change on the part of public sector outlets as well.

The frequent and significant increase in crude prices, along with the resistance on the part of average consumers, continued to challenge government’s attempts to rationalise pricing. Thus, successive governments, including the NDA and UPA found it extremely hard to adjust petrol and diesel prices to cost. Along with LPG prices, diesel and kerosene prices were kept under control. Only the price of petrol was deregulated and this resulted in petrol prices shooting up to around Rs 78 per litre in retail.

The Modi government was incredibly lucky in crude prices crashing to little over Rs 30 per barrel through 2014. This made it possible for the government to dispense with price control on diesel. It also took bold to dispense with the old system of huge subsidisation of LPG. The Aadhaar platform was used along with the Dhan platform to deliver subsidy directly to the beneficiary. In that process, the government was able to eliminate a large number of bogus claimants. And the appeal of the prime minister also helped to wean a good number of the haves away from the subsidy.

The government also adjusted the excise duty on diesel and petrol upwards to benefit out of the fall in crude prices. Thus the full effect of the decline in crude prices has not been transferred to the consumers. This was necessary to bolster up the revenues of the Central government at a time when industrial growth was sluggish and corresponding revenue growth was not to expectations.

When the price of crude increased from a low of around $ 30 to more than $ 50 per barrel, the retail prices of petrol and diesel inevitably increased. Oil marketing companies adjust these prices periodically, and the consumers and several state governments have been voicing their protest.

One is thus able to see the contrast – the ease with which the US has been able to adjust to variations in the price of crude and its absence in India. State governments that run a large fleet of public transport, find it difficult to increase fares in tandem with rise in the price of diesel. Thus, they protest vociferously over the continuous and sizeable increase in the price of diesel. It needs a lot more efforts to explain the why of these fluctuations. Unfortunately, policy makers in the centre are not quite capable of doing this.

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