by N.S. Venkataraman    4/6/2018

Whenever petrol or diesel price is increased, there used to be animated discussions in the print, visual and social media in India. However, when the price comes down, there would be a deafening silence.

Now, with the petrol/diesel price staying at a high level, Modi government is being accused of being insensitive to the demand of the people to reduce the price. It is said that taxes should be cut to lower the price of petrol and diesel.

What is the issue?

India presently imports around 220 million tonnes per annum of crude oil, whereas India produces only about 27 million tonnes of crude oil per anum. There is little possibility of significantly increasing the domestic production of crude oil.

Even as the price of diesel and petrol is at a high level, the consumption of diesel/petrol has been increasing at 6 to 7% every year, necessitating the increase in import of crude oil for the production of petrol/ diesel in the petroleum refineries.

Price of crude oil in the global market is likely to increase in the coming years due to the following reasons.

1. Due to the low price of crude oil in the last several years, many crude oil exploration efforts in the world have been suspended. With the existing wells steadily and inevitably depleting, global production of crude oil is unlikely to keep pace with the increase in demand in the immediate future. Therefore, there would be price pressure on crude oil in the global market due to production constraints.

2. Major oil producing countries (OPEC) and Russia have deliberately decided to restrict the production of crude oil to prevent fall in the crude oil price in the global market.

3. While shale oil from the USA can help to some extent in sustaining crude oil production to the level of need, it cannot do so over an extended period, since shale oil well life is generally only around twelve months, after which the production would reach an uneconomic level, forcing tapping of the well. There are protests in the US about extending greater areas for drilling new shale wells due to environmental reasons.

Given such global scenario, with India’s import of crude oil increasing steadily and crude oil price in the global market soaring, Indian economy will suffer enormously due to the massive outflow of foreign exchange, maybe to the level of 70% of the foreign exchange earned, for import of crude oil. This would be an unsustainable situation.

There is need to curtail the consumption of petrol and diesel in India to reduce the crude oil import. While the price of petrol and diesel have been remaining high, still it’s consumption has been going up in India. If the price of petrol and diesel would be brought down to meet the demand of the people, then indeed the consumption of petrol and diesel would register a further increase in growth.

To reduce the dependence on import of crude oil, Modi government has been rapidly increasing the solar and wind power generation capacity. Solar power capacity was just around 1100 MW when Modi government assumed office four years back Today, solar power capacity in India is around 23000 MW. Wind power capacity has also been substantially stepped up. Steps are being initiated to build further nuclear power capacity, which is clean energy. All such efforts take time to make the desired impact.

Modi government’s anxiety to keep the price of petrol and diesel at a high level is appropriate, as it would prevent an increase in demand and consequent increase in crude oil import.
Of course, it can be asked that up to what level domestic price of petrol and diesel would be allowed to increase. The government has to think on this and perhaps, sacrifice tax to some extent both at central and state government levels to ensure that price would not increase to the back-breaking level.

There is an issue in reducing the tax as it would affect the income of the government, which is under compulsive need to introduce several welfare measures and investment in infrastructure projects. Where will the money come from?

A large section of people want lower petrol and diesel price but also want the introduction of several welfare measures, build up of investment in government projects and employment generation.
One cannot have the cake and eat it too.

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