Promotion through pricing

This piece is the sixth of the series of articles on development of the Indian petroleum industry since its inception in 1867. In this article, we shall focus on how the 'administered pricing mechanism' and the policy of 'cross subsidisation' had helped petroleum products emerge, by the late 1980s, as the major energy source and an important feedstock for fertiliser production in India.

Dealers and distributors had played an important role in establishing petroleum products as an essential item. By 1986-87, the public sector marketing companies had over 22,500 dealers and distributors throughout the country. To distribute oil products to remote areas, scheme such as Taluka Kerosene Depots (TKD), Multipurpose Distribution Centres (MPDCs) and low-cost retail extensions of the LPG network to the smaller towns were launched. On behalf of the Indian government, the Oil Coordination Committee (OCC) monitored the supply and distribution of petroleum products. The country was divided into 166 consumption zones. At the monthly Supply Plan Meeting (SPM), attended by the members of the oil industry, OCC and Railways, a comprehensive supply and distribution plan was finalised.

Pricing strategy to promote petroleum

The Indian state followed the same pricing policy to promote petroleum products, as followed by the Burmah Shell Company in the early decades of 1900 to replace vegetable oil — used as a lighting fuel — with the imported kerosene. Though the government did not encourage oil companies to advertise openly for their products, the administered pricing (cross subsidisation between different products) policy of the government had persuaded the target customers to use more petroleum products by motivating them to switch over to oil products from other existing energy sources like coal. Here are a few examples of cross subsidisation among different products:

✯ Naphtha used for fertiliser production was subsidised heavily but it was supplied at a higher rate to the petrochemical industry. In 1976, the Oil Price Committee (OPC) calculated the ex-refining price of naphtha at Rs 840.90 per MT. But the ceiling price of naphtha for fertiliser plants was kept at Rs 697 per MT and for petrochemical plants at Rs 1,132 per MT. In 1986, the price of naphtha for petrochemical industry was raised to Rs 3,400 per tonne when the world price c.i.f. Bombay was at Rs 1,500 per tonne only.

✯ Taxation of motor spirit and subsidisation of diesel and kerosene.

✯ Multiple pricing for liquefied petroleum gas (LPG) that was mostly used in domestic sector as fuel. LPG sold to domestic sector was subsidised and to the commercial sector taxed.

Outcome of cross subsidisation

The main objective of cross subsidisation between products was to attain distributional equity and social welfare. In reality, it helped to popularise different petroleum products to target markets. The following examples would strengthen our observation.

Naphtha

✯ Subsidised naphtha popularised low-cost chemical fertilisers that were one of the major inputs of the green revolution package. But it hindered the growth of petrochemicals industry. Moreover, as the international price of naphtha was much lower than the non-subsidised domestic price, Indian petrochemical industry faced serious competition from global giants. Between 1969 and 1989, demand for naphtha in India had increased five times — from 6,65,000 to 33,49,000 metric tonnes. Out of the total production of naphtha in 1989-90, petrochemicals industry consumed only 979 thousand tonnes (29 per cent) and the fertiliser sector, as expected, consumed the major share — 2,298 thousand tonnes (69 per cent). To meet the increased demand for naphtha, India had to take two loans from the World Bank during 1980s to purchase refining technology suitable for the production of more light distillates like naphtha. This adversely affected the production of middle distillates like HSD which was also in high demand.

✯ Most importantly, subsidised naphtha discouraged the use of other available raw- materials like coal and gas as feedstock for fertiliser production though India had developed efficient coal-fired fertiliser technology in the early 1970s. And faulty gas policy led to flaring of as much as over 30 per cent of produced gas in the late 1980s.

It may be mentioned here that while India had discarded coal for fertiliser production, China embraced it. In 1999, in the medium- and small-scale fertiliser plants in China, the use of coal, as feed stock, were 66.22 per cent and 95.1 per cent respectively. In 2009, China was the largest producer of nitrogenous fertiliser in the world and 76.4 per cent of those were coal-based.

Kerosene and HSD

✯ Between 1975-76 and 1989-90, subsidised HSD and kerosene consumption increased by 300 per cent and 250 per cent respectively. Kerosene subsidy was given to the poorer section of the population mainly. The steep increase in kerosene consumption implies that either the number of poorer people using kerosene as fuel had increased in India in that period, thereby widening the consumer base, or more kerosene was used by the existing consumers. However, it was also reported that about one third of subsidised kerosene, which was provided through the public distribution system, was diverted for adulteration.

✯ Market study on the use of kerosene showed that kerosene was consumed more by the urban and middle-income groups rather than the deprived sections. It was not clearly established that subsidisation of kerosene was a suitable fiscal tool for helping the poor. But subsidised kerosene had definitely replaced coal as a cooking fuel.

✯ Subsidised diesel helped the following sectors:

l More goods were transported through long-distance heavy vehicles (trucks) though railways should have been an ideal solution to a country like India.

l Cheap diesel induced Indian railways to completely phase out coal-based loco engines with diesel engines. Coal, which was abundant in India, could be used in non-priority sectors of Indian railways.

l The new agricultural package that was introduced in India in the 1960s, in the name of 'green revolution', wanted to change the traditional farming methods. For this it needed high yielding seeds, chemical fertilisers, abundant water, modern tillers like tractors, pesticides etc. Subsidised diesel made equipment like tractors and pump sets more attractive to the farmers.

In 1989-90, diesel consumption by trucks amounted for 42 per cent, irrigation pump sets 30 per cent, buses 17 per cent, railways 8 per cent and remaining 3 per cent was consumed by ships, three wheelers etc. The large proportion of diesel consumption by trucks indicates the growth of freight movement by road. In 1950-51, railways accounted for 89 per cent of total freight movement which fell to 66 per cent in 1970-71 and further to 46 per cent in 1988-89. Contrary to this, freight movement by road went up from below 30 per cent of total freight in 1970 to 54 per cent in 1988-89.

Most importantly, out of the total diesel consumption, in 1986- 87, for freight haulage, 88 per cent was utilised by trucks for carrying 59 per cent of total diesel hauled freight. The railways, in the same year, accounted for only 12 per cent of total diesel consumption to move the remaining 41 per cent of total diesel freight. This clearly indicates the much higher energy efficiency of the railway in freight movement. Nevertheless, freight movement by road had overtaken rail in India mainly due to availability of cheap diesel and non-expansion of the railway network. During 1950-90, rail networks in India had expanded by less than 20 per cent.

In the late 1980s, the two petroleum products which India had to import the most were kerosene and HSD. The table shows that consumption of these two products increased manifold during 1970-90. In 1989-90, kerosene and HSD imports (5.5 MMT) constituted about 85 per cent of total (6.5 MMT) petroleum imports. These were in addition to crude oil imports to feed the refineries.

LPG

Subsidisation of LPG for domestic consumers was aimed at the urban middle and upper class who were the major consumers of LPG. Incidentally, those people were very vocal and could influence the public opinion in Indian politics. However, subsidy had made the use of LPG most widespread, substituting coal as cooking fuel. The coal-gas became uneconomic and its projects got delayed or abandoned. The failure of coal gas project at Dankuni is a case in point.

In the late 1970s, it was decided that India's huge coal stock would be used to produce coal gas and distribute it to both domestic and industrial consumers. After gasification, the coal residue would be used to produce 'smokeless coal cakes' to be used for cooking. Accordingly, a new plant was installed at Dankuni Coal Complex (a subsidiary of Coal India). Coal India would supply coal to DCC to produce coal gas and smokeless coal cakes. The Greater Calcutta Gas Supply Corporation (GCGSC) – a West Bengal government undertaking — was to distribute coal gas to consumers. But with the heavily subsidised LPG price, coal gas could not compete in the market and the project was abandoned.

Conclusion

The above discussion shows that by the end of the 1980s, the public sector marketing companies had established petroleum products as the major source of commercial energy. Over the years, its consumption had increased substantially replacing other alternative energy sources. In this phase, oil products have successfully replaced coal as a major fuel for transportation and cooking. As Indian state heavily subsidised naphtha for fertiliser production, discarding its indigenous coal-based fertiliser technology, the state and its foreign collaborators were able to control its food production also through 'administered pricing, mechanism of petroleum products.

In the first article of the series, we observed that during the initial eight decades (1867-1947), the nascent oil sector of India was primarily dominated by few foreign companies. Major corporate houses of India were not prepared to take the risk of either oil exploration or refining. Thus, the entire oil sector was dependent on foreign capital and technology. Henry Kissinger, the noted US strategist, once said: 'Control oil and you control nations; control food and you control people.' This led to an important question: who actually controlled the Indian oil sector during its next two phases, (1947-1990 and 1991-present) of development.

Series of articles 2-6 have analysed the most critical phase of the Indian oil Industry when a newly independent state wanted to establish its national identity through rapid economic development under state control. Our analysis on the development of the Indian oil sector suggests that during this phase (1947-90) the aspiration of self-reliance and simultaneous dependence on foreign capital and technology had resulted in a relation of insignificant conflicts but robust cooperation between the Indian state and the foreign interest. Participation of Indian companies and application of indigenous technology were almost negligible in this period also.

The next article will initiate the discussion on the development of the oil industry during the economic liberation phase (1991-present) of India.

Views expressed are personal