At present India faces the following threats to its economic growth:
1. Rapidly growing fiscal deficit which is currently scaled at 6.7% of GDP.
2. Huge import of Crude Oil, which eats India's Forex reserves and amounts to 77% of the Oil
consumption in India.
3. Spiral downfall of India's Agriculture sector which employees 52% of India's population and
contributes to 19 % of its GDP.
4. Untapped Renewable Natural Energy sources .
As Jim Rogers, of Rogers Holdings in Singapore has pointed out in regards to India, "with overall debt at 80% of GDP the country is on the edge of what is containable". If we go by this statement then it means that it is high time that we start having positive BOP's which, unfortunately ever since 15th August 1947 has been on the negative scale.
Now, Balance of Payment(BOP) is negative when a country is importing more and exporting less. A crucial role is also played by the currency of the country to balance the BOP and result a country to be a debt free Nation.
But whats stopping us from that?... aren't we getting richer every year and keep boasting of more Billionaires in the Forbes top 10 list ! We have certain major problems that hinder our race to prosperity and peace.
In the interim Budget 2010-2011 tabled in the parliament, there was absolutely nothing of significant importance for the so called 'Aam Aadmi'. I thought of analyzing that what exactly is this 'Aam Aadmi' that the GoI was determined to help to prosper, a fact mentioned in the election manifesto of the INC.
A study by National Council of Applied Economic Research (NCAER) projects 98.1 million household with projected income between Rs 16001 - Rs 45001. In respect to the Suresh Tendulkar commitee's report 2009, any household below a monthly income upto Rs 16000 should be projected below the poverty line. Interestingly, these 98.1 m households play the most crucial role in the sustainability of both the poor and the rich.
But, the interim budget had nothing substantial for these people, as a result the stock rose to 350 points within 2 hours. This is mainly because stocks is the most widely mode of investment for the middle class. Gold at Rs 16,700 was slapped with a further Rs 300/10gm tax. This was just the beginning, very next day petrol & diesel prices surged by Rs 2.68 & Rs 2.58. All this at a time when the country is facing an all time high inflation of 17.8% is in one word 'Preposterous' !
Lets find out what causes the GoI to increase the fuel prices ?
During 2004-2008, when the crude oil price was increasing, India was one of the few countries where petrol prices decreased. During this time, three high-level committees were formed to take a look at how to handle petroleum prices. In 2006, the Rangarajan Committee was formed, followed by the Chaturvedi Committee in 2008 and the Kirit Parikh Committee in 2009.
All three recommended that oil companies be allowed the freedom to fix prices. But the Government, headed by an economist, has been unable to implement them. This is because politicians do not like to lose the opportunity of making black money, to the extent of Rs 35,000 crore a year, by diverting subsidised products.During the last six years, there have been under-recoveries of Rs 3-lakh crore by PSU oil marketing companies while Reliance and Essar closed their petrol stations. This money could have been used to build thousands of schools or hundreds of hospitals to serve the poor better. But in the name of helping the poor, politicians belonging to all parties want the government to control petroleum prices.All three committees had suggested that PDS kerosene be distributed through smart card or the coupon system to prevent its diversion.
Before we jump on to any conclusions, lets analyse this:
A barrel of crude is equal to 158.987 litres, which means that the weighted price of $80 a barrel implies that a litre of crude costs about 50.3 cents, or Rs. 23.1 a litre (assuming that a dollar is worth Rs. 46). Incidentally, a large part of the confusion in the media about the “losses” of the oil companies is caused by the fact that the quantity is expressed in barrels while ordinary consumers actually feel the pinch in rupees for every litre.
The cost of crude oil refining, which is essentially the process of converting crude to products such as petrol and diesel, varies a lot depending on a host of factors. But it depends critically on the grade of crude used and a refinery’s vintage. The refining margins would vary but they would range at the most from about 20 paise a litre for Reliance Industries’ refinery at Jamnagar in Gujarat to about Re. 1 for an old refinery.
This means that in respect to this , under the current situation the price for Petrol & Diesel must not go beyond Rs 25/litre! The rest of Rs 23 is added due to the Freight Surcharge Pool Account and CST/Sales surcharge scheme. These are protection mechanisms to safeguard the under-recoveries that the GoI projects as its losses.
On June 4,Prime Minister Manmohan Singh justified the hike by citing their “under-recoveries,” which he claimed amounted to about Rs. 2,45,000 crores. The Prime Minister was, of course, careful in his choice of words. He termed them “under-recoveries” rather than outright losses.
Let us understand the term “under-recoveries” with this example :
Suppose i buy a piece of land for Rs 50 Lacs and plan to send it at Rs 90 Lacs after a period of 2 years, but , unfortunately, due to XYZ reasons i manage to sell it at Rs 70 Lacs, then, 20 Lacs is the under-recovery of my investment. In other words, a fallback from a hypothetical projection of profit is termed as under-recovery. Is is clearly different from the term "losses". So, the man who revived India from its worst economic nightmare in 1991 is now eye-washing the people, towards whom he has an obligation to provide socio-economic justice? Perhaps, this is for the readers to decide at their own discretion.
If there were losses in the Oil and Natural gas sector, How could ONGC meet the stiff criteria to achieve the Maharatna status?
ONGC has reported its first gain in five quarters by registering a 5.9 per cent increase in its net profit during the second quarter of 2009-10. The net profit for the quarter stood at Rs 5,090 crore (Rs 4,808 crore for the corresponding quarter previous year). This is on account of lower subsidy outgo and higher per barrel realization on crude oil sales. The performance of the oil companies does not suggest that they are on the verge of a collapse. IOCL’s gross refining margins — the difference between the market price for crude oil and the market price for fuel — was $9.1 a barrel in the April-December 2007 quarter, increasing from $ 3.6 in the same quarter of the preceding year.
Does this mean the problems of the public sector oil companies are entirely fictitious? At present the OMCs do face a problem of accessing crude oil in the international market, especially at competitive rates. However, this appears to be more of a short-term cash-flow problem rather than outright losses. The Reserve Bank of India has purchased bonds issued by the government to the oil companies, thereby providing some relief to them.
It is also true that the public sector oil companies sell LPG at lower-than-market rates but are short-changed by the government through the offer of oil bonds, which are in effect a form of deferred payment. The government, it appears, is more concerned about the profits of the oil companies than setting a fair and transparent price for the scarce resource.
It is expected that with complete deregulation, imported finished products with play a significant role in competition to indigenous product. Hence, international price will play a significant role in determination of petroleum products in the country. This is because : (a) the inland refineries do not incur transportation cost , (b) no excise duty on indigenous crude but a 35 % imported custom crude, thus, prices may settle at much lower level.
Lastly, i sincerely hope that Pranab Da could convince Murli Deora to completely de-regulate the oil prices in India and save the Aam-Aadmi from the insurmountable inflation in major essential commodities.
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