Tuesday, July 04, 2006

The privatisation of petroleum industry-2

This is in continuation with the previous post and I have decided to write this after a few comments from my fellow bloggers who have read my article. One blogger expressed an opinion that a few such ideas are enough to take our country back to the days of quota and license raj. Others were mostly concerned about the ease of implementation. So, I would like to make a few points clear.

Firstly, I am strongly against quotas. They only lead to distortion of demand and add what are called dead weight losses and reduce the total surplus. But even subsidies do the same thing. They increase the demand for a product, just because it is available at a price much below its free market price. And we are unable to see that, just because our government is pumping in all that difference or taking the blunt. Once we are supposed to pay the actual price of fuel, we tend to reduce our consumption. This is the basis for the whole argument. You can still by as much fuel as you want, but only that you will be subsidised less and less as you want more.

I feel it is unfair to subsidise every one equally. People who use fuel-guzzling cars pay the same price for fuel as people who use fuel-efficient vehicles. And since there is now way to sell diesel at a higher price to an SUV owner and at a low price to the owner of a Maruti800, which also is extremely difficult, the only way I see is to make people take the blunt as they use more. This differential pricing, based on consumption doesn’t introduce any dead weight losses, but just leads to shifting consumer surplus to producer surplus.

I will present one more point before going to distribution system. Consider a citizen who doesn’t use an automobile. He pays his tax and the government in subsidising fuel is using a part of this tax money. I fear, according to current subsidies, this amount is going to be substantial. These subsidies reach someone else, who may not be a taxpayer. While the taxpayer doesn’t receive any benefit for the part of the money he has spent, a non-payer gets an undue benefit. Is this just? You may come up pointing to government’s expenditure in various fields like education and health. But as far as I can see, these actions benefit the society. So, I feel there is a stronger need for this differential pricing. Not just to unload our government’s subsidy, but to all that development that can be possible, once this money is diverted to other activities.

Now, coming to the distribution system. The idea is not to fix a limit on the quantity of petrol/diesel you can consume. Have as much as you want, with the only fact that the prices approach the world prices, as you want more. To achieve this, each consumer gets something similar to an ATM or a credit card. Once private companies take up distribution of fuel and manage fuel outlets, it is not very difficult to link them up, electronically to regional data banks that record the consumption pattern of a consumer. Even the existing lines used for credit cards can achieve this purpose. How many villages didn’t get connected to the Internet as philanthropic institutes spread their activities? When the objective is profit, I don’t think any company will hesitate towards this action.

I am sorry if I am being too descriptive, but I am excited about this and hence want to explain clearly. As you come to a fuel outlet you will be required to present your card for buying fuel. This card then lets the transaction take place between the database and that outlet, while at the same time updating your consumption record. And according to the record, you are billed. If things break-down, as in case of emergencies, you can always buy fuel, though it may be priced a bit higher, which will not need a data base interaction.

The amount of subsidy government pays will depend on this database. Please don’t tell me that it can be tampered with! I just read a news item dealing with the petrol pricing methodology and the way public sector companies are losing out to private players with the rules of subsidies. It said,

While private petroleum companies need not sell LPG and Kerosene at subsidised price, the government companies sell them at a lower price and are hence losing out vis-à-vis private players.”

I am completely against taking away subsidies on LPG and Kerosene, for they are the cooking fuel for the poor and middle class. But petrol and diesel are not as critical as LPG and Kerosene. Public transportation is still available, and it only needs an improvement in efficiency. Haven’t we heard of the popularity of local trains in Mumbai and Chennai? They serve an excellent alternative to road transport.

Let me tell you one more thing. The same article I read above also tells about the pricing policy of petrol and diesel.

Most people would be aghast if they understood how petroleum prices are actually set in India. India is self-sufficient in refining crude oil for conversion to petroleum products. Since the dismantling of the administered pricing mechanism (APM) in 2002, prices are determined using the import parity principle. This is a purely notional price, arrived at on the basis of the assumption that petroleum products are imported. The notional price includes the free onboard price, ocean freight, insurance, exchange rates, customs duties, the losses during transit and port charges. Further, the retail selling price that consumers pay includes the cost of transport from the depot to the retail outlet, the marketing cost, the margins of the oil companies, State-specific taxes and duties, dealers' commissions and other charges. As the accompanying graphic shows, taxes, duties and levies of the Central and State governments account for more than half the retail selling price that consumers pay for fuels.”

Now I am not able to tell you for sure, whether petrol needs to be sold at world market price or domestic price. But in an open economy, the prices are supposed to be equal to rule out disparities and distortions.


Shankar said...

you have put forth the ideas across very well, of course there will always be those who can find fault with some of the measures (me included :P ), i mean, finding fault with others is easiest this to do. perhaps an economist can figure out which among these are possible, how many of them have to be modified and how many are not possible etc.

dilip said...

Dude mind that you are in india a country with highest population density unlike America or Australia idea of petrol card is very impractical here.Even ration cards are duplicated here because of bribery red tape.Forget about Petraol cards.And i dont understand funda of large consumers paying more wherein they should be subsidided as they are big consumers so its inerest of company to maintain them and keep them buying more and more