Oil is a slippery subject, as Prime Minister Modi’s government is discovering to its acute discomfiture. They have no excuses; they have cruised for the last four years with insouciant ease on the back of falling international crude oil prices. To understand the magnitude of that economic tailwind, just take a look at two figures; under the Congress party led UPA, the per barrel dollar price had peaked at a staggering USD 147 per barrel while under Modi, the barrel price bottomed out at USD 28 a barrel.
This was not just akin to a steep discount, but virtually like a garage distress sale. Ordinarily, a smart government would have done two things; one, passed on the benefit of falling prices to consumers as part of principled mark-to-market pricing (a transparent mechanism), and secondly, created a price equalisation fund as a financial buffer for the unforeseen future when global crude oil would surge again (it is a cyclical commodity, after all). They did neither. Now it is comeuppance time. The chickens are coming home to roost.
What is particularly striking is the flagrant superciliousness of this government; it’s a heads-I-Win-tails-you-lose approach. Let me elaborate. When crude oil prices collapsed, the ordinary Indian was unfairly taxed (Modi government has collected a whopping ₹13 lakh crore as excise duties), and when prices rose, the government hikes prices further with the archetypal pretext; it is on account of “global factors”.
For the average Indian household, it is a double whammy, a lose-lose situation. It is also a manifestation of political immorality. In short, Modi has calculatedly assumed that the average Indian can be bamboozled by the government spiel of uncontrollable externalities; a blame-it-on-Rio strategy. It has failed to work. The trusting people of India (who queued up to withdraw their own cash in the foolish notion that Modi would obliterate black-money following that bizarre voodoo nonsense called demonetisation) are experiencing the once bitten, twice shy syndrome. They are angry. They know that Modi is now conveniently taking umbrage citing international oil price trends. But how far is it true?
By now practically every Tom, Dick and Hiren know that India imports 80% of its crude oil requirements; thus, we are indeed susceptible to global volatilities. Thus, a pragmatic farsighted government would beef (apologise for using the controversial word) up its foreign exchange reserves to meet dramatic upward spurts in prices, without resorting to panic purchases of buying dollars to pay for import bills.
India’s export performance has been woebegone (merchandise exports specifically), despite a burgeoning world economy. Hence, the alarming depreciation of the Rupee by 15% in 2018, giving it the sobriquet of Asia’s worst performing currency. In fact, the Rupee has fared miserably also against the Euro and the British Pound, depreciating by over 10%. A devalued Rupee has aggravated pressure on oil prices, and this has less to do with the Turkish Lira and the Iran sanctions, and more to do with a ham-handed mismanagement of the domestic economy. That is an irrefutable fact.
Modi has calculatedly assumed that the average Indian can be bamboozled by the government spiel of uncontrollable externalities
The continuously headline-hunting government underestimated the repercussions of oil price escalation. Modi government is sloppy, slothful and snoozing, relying on oil revenues to fund fiscal deficit (ostensibly for the so far tawdry capital assets creation) instead of targeting personal and corporate income tax collections. Fact is, a healthy economy has lower indirect taxes like GST, petroleum taxes, VAT etc as they are intrinsically regressive.
For instance, the poorest man in India pays the same amount for a litre of petrol, diesel or kerosene as does a Gautam Adani or an Anil Ambani. It accentuates inequalities as fuel costs become a bigger component of their household budget. So why has Modi scored a self-goal? There can be just two explanations. One, political arrogance that makes one believe that a twisted propaganda blitz can alter the media narrative (they have frightened mainstream media considerably). Second, an appalling mix of laziness and incompetence. The latter needs elaboration.
Petroleum products are an essential commodity and have an inelastic nature; increase in prices does not lead to an equal proportion of demand fall, thus increasing total revenue for the government. Even if price of petrol/ diesel continues to skyrocket, the ordinary consumer will not stop driving their cars, riding their scooters or motorcycles, or not use LPG for cooking at home, or avoid using public transport (where the tickets would also have become more expensive).
Thus, the government can lazily ensconce in opulent luxury while 130 crore Indians pay their bills at gas stations. The PM can say goodbye to economic governance and gather frequent flier miles on extravagant foreign tours while India bleeds. This is exactly what has happened.
The UPA gave subsidies fully aware that it would impact fiscal deficit, and then reworked towards correcting it along with current account deficit. It ultimately neutralised the pernicious foreign exchange crisis posed by USA’s decision to reverse quantitative easing. The NDA has indulged in daylight exploitation, sorry extortion of the ordinary Indian consumer. It can be called as the Great Oil Robbery.
To make matters from bad to worse, India has begun to import coal, thus adding to current account deficit, headed towards crossing 3% for FY 2018-19. The government appears inextricably tangled in an awful mess of its own making; negligible exports, falling Rupee, rising oil burden, and the threat of impending inflation. The RBI has bailed it out somewhat by not raising the repo rate, but the stock-market bloodbath has been brutal as a consequence.
With OPEC refusing to increase production to stabilise oil prices, and the Rupee being relentlessly badgered, Modi government has got both its feet on a banana peel. A fall is inevitable.
(The author is National Spokesperson of the Indian National Congress and the President of All India Professionals Congress, Maharashtra. The views are his own)