Friday, November 4, 2011

Congress strategy clear…..after one more petrol price hike

Yesterday’s petrol price hike is another example of the Congress’s continuing strategy to prioritize the aam aadmi over the urban middle-class. To take from the relatively well off (the ones who complain whenever petrol prices go up) and give to the poor (the aam aadmi – which definition does not include the urban middle-class). What many people who read blogs call the Congress’s insensitivity to the aam aadmi is actually misplaced. The aam aadmi does not include most readers of blogs. The aam aadmi is out there in the rural areas; and in the urban shanties; the aam aadmi does not drive a two wheeler or a four wheeler. He/She uses the public transport system….

The Congress mostly allows petrol prices hikes. It allows the prices of diesel, LPG and kerosene to rise much less often. Let’s look at some stats. In the last two years (calendar years 2010 and 2011), the prices of petrol have been increased 13 times; the prices of diesel only 6 times. Further, the price increases in diesel are of a much smaller order. The price of petrol has been increased 43% in the last two years (from Rs 51.68 in Feb 2010 in Mumbai to Rs 73.81 after this latest increase); the price of diesel only by 16% (from Rs 39.6 to Rs 45.99). It’s clear the Congress is happy to increase petrol prices, but will keep a tight control on diesel prices.

The reason for this is not difficult to understand. Increasing petrol prices hurts only the higher echelons of society – those who drive two wheelers and four wheelers (and like I mentioned, these are not the aam aadmi in the Congress’s eyes). Most of these people live in the urban areas (towns with pop above 3 lacs or so) and have been beneficiaries of the economic boom of the last twenty years. Further, the plight of the two wheeler users is vastly exaggerated. Let me explain. Take a two-wheel driver in a city like Ahmedabad or Chennai or Pune or anywhere. On average, the person may be driving 40 kms a day. That’s 1200 kms in a month. Given the improvement in fuel efficiencies over the last several years, it is not unreasonable to expect bikes to have a fuel efficiency of 60 kms/litre. So this person uses about 20 litres of petrol in a month. If the price of petrol has gone up by about Rs 25 in the last two years, that comes to about Rs 500 per month. That’s it – Rs 500 rupees a month in the last two years. Consider the salary of this average person – let’s take him to be a secretary in an ordinary private sector company. If two years back, this person was earning Rs 8000 a month in Ahmedabad, today he/she is earning about Rs 11000 a month (assuming just a 16% annual increment). That’s an extra Rs 3000 a month in his hand. So as far as taking care of the petrol is concerned, there is no problem at all! (Of course, there are price increases in other items also – but overall, the salary increases are higher than inflation).

If instead, the government did not increase the price of petrol, then the oil companies would go in a loss. I heard some commentators mention on TV last night that petroleum companies were making “thousands of crores of profits”. Let’s investigate this claim. In the year ending March 2011, Indian Oil made a net profit of Rs 7445 crores (margin: 2.3%), BPCL made a net profit of Rs 1547 crores (margin 1%) and HPCL made a profit of Rs 1539 crores (margin 1.2%). So indeed, the petroleum companies did make so much profit. But let’s look at what has happened since then. In the Apr-June 2011 quarter, HPCL lost Rs 3080 crores, BPCL lost Rs 2562 crores and only IOC made a profit of Rs 3905 crores. In the July-Sept 2011 quarter, HPCL lost Rs 3364 crores, BPCL lost Rs 3229 crores and IOC also lost Rs 3718 crores). The companies are not making profits; they are making losses. And even when they were making profits, they had absysmally low margins. A company that makes 1-3% margins would be considered to be on the brink of losses all the time.

Who funds the losses of these companies? Very largely, the government. The government owns 50% of HPCL, 60% of BPCL and 90% of IOC. If the government has to keep funding these companies, whose budget gets cut? The budget of some or the other scheme that is there for the poor. So the poor hurt. Let’s say the government continues to spend on all schemes and cuts nothing at all. Then the fiscal deficit goes up and that leads to inflation. Who gets hurt if inflation picks up? The poor (I will explain later in this note how the current inflation is different – it is harmless for the poor). Net net, if petrol prices are increased, the urban middle class and the rich hurt. If prices are not increased, the poor hurt. The Congress is clear who it stands for.

There is the other complaint made by people who complain about petrol prices rising. That the government levies such high taxes that the retail prices are one of the highest in the world. Dead right. The petrol prices in India are indeed much higher than in our neighboring countries. The question to ask is: where do all these taxes go? You guessed it right – into the Consolidated fund of India out of which various pro-poor schemes are run. So if the government cut taxes, again the poor would lose out.

Why do I say that this is a conscious strategy of the Congress?

Consider the other moves the Congress has made in the last five years or so. Firstly, it has been continuously increasing the MSP (Minimum Support Prices) paid to farmers. In the 6 years of NDA regime, MSP for rice increased by 25% and for wheat by 15%. In the six years of UPA1 and onwards, the MSP of rice increased by 70% and of wheat by 72%. It’s the same story with coarse grains, pulses, sugarcane, cotton, soyabean and sunflower oil. There is more money being given in the hands of the farmers, even though this is leading to hardships for the urban middle-class. There is a distribution of wealth taking place. That’s why the current food inflation is harmless. The poor are not getting hurt, even though the urban middle-class is.

Take the NREGA scheme that the Congress launched in 2005. As the JP Morgan report shows and as I mentioned in my post of October 25th (“RBI is wrong in increasing interest rates…..this inflation is harmless…..”)In the pre-NREGA period (1999-2005), nominal wages (wages inclusive of inflation) grew at an average annual rate of just 2.7%. Post NREGA (2006-2009), average nominal wage inflation has been 9.7%. But in the Jan 2010 – May 2011 period, the wage inflation has really surged to nearly 20% (in fact 22% in May 2011.  So the landless laborers in the rural areas are getting more money in their hands than they ever were in the past. Of course, the poor are given employment for only 100 days in a year and of course, there are several problems in the implementation of this scheme, but the fact is that for the really poor, the NREGA has come as a god-sent.

Take also the Food Security Bill that is likely to come up in the winter session. This is another pro-poor bill that guarantees food security not only to the poor, but also to those who are above the poverty line. Its impact will however be mostly felt by the extremely poor who often have no security at all. I have no doubt that the BJP will criticize this bill.

Likewise, in 2008, the Congress waived off loans to marginal farmers as part of the “AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008”. This had cost the government about Rs 60,000 crores. Again, the BJP had criticized this….but it helped the poor and they voted for the Congress. Again, this was a clear strategy that the Congress adopted then.

Look at the Land Acquisition Bill. Again, it’s a move that industry has been upset with. The cost of land acquisition is set to rise dramatically as a result of this act. Where will all this extra money go? In the hands of the land owners in the rural areas – most of them small or marginal. Again, a strategic thrust aimed at the rural folks.

The Congress reckons that the only thing that can upset its pro-poor plan is allegations of corruption. That is why it is now – although very belatedly – taking steps to clean up its image. After yesterday’s meeting with the Standing Committee of Parliament looking into the Lokpal Bill, Anna reportedly has came back satisfied. He believes that the Lokpal Bill will be a strong one. If Anna can be satisfied with the efforts on the corruption front, it will be a big monkey off the Congress’s back. Likewise, the Congress is moving ahead on decriminalizng politics. Again, this is likely to get it the support of Anna. The Congress is hoping that if it wins the support of Anna by 2014, it will be in an unassailable position in the elections of that year.

It’s clear the Congress is pursuing a clear strategy. And in doing so, it is upsetting the BJP’s applecart. In comparison to the Congress, the BJP prefers to be on the side of the urban middle-class. That’s why it criticizes every single increase in petrol prices. In the last two years of NDA rule (June 2002 to May 2004), the NDA increased prices of petrol by 16% and of diesel by 20%. During the NDA rule, prices of LPG cylinders increased by 59% (from Rs 152 in Feb 1999 to Rs 241 in May 2004); during the UPA-1 rule, the LPG prices increased by only 16% (from Rs 241 in May 2004 to Rs 280 in April 2009). The BJP’s focus is clearly the urban middle-class; the Congress’s on the aam aadmi.

In addition to inflation, the BJP has been trying to build a case against the Congress on corruption. The Congress has given it enough opportunties to do so. However, even here the BJP finds itself on the back foot – the party is itself so badly embroiled in corruption. It has had to sack two CMs – Karnataka and Uttarakhand on grounds of corruption. It has failed to enact a Lokpal in Gujarat. It has enacted a good Lokpal law in Uttarakhand now, but it has lost ground on the 2G battle yet again – with Murli Manohar Joshi being caught on the wrong foot for having urged the PM not to auction the 2G spectrum.

For the BJP, the best thing would be if the elections are held now. The country is agitated by corruption issues and if elections are held now, the biggest loser would be the Congress. I doubt if the BJP will gain (like I wrote in an earlier post – regional parties are more likely to gain), but if the BJP has any chances at all, it is now. That is why it first tried to provoke the DMK two days back when Kani was not given bail and when the DMK went into a huddle – supposedly to decide whether it should pull off its support to the Congress. It again tried to provoke the Trinamool Congress yesterday – pushing it to withdraw support to the Congress. The BJP knows the Congress’s game plan and is desperate; and it is starting to show now….

The real truth is that petrol price hikes upset the urban middle-class but help the aam aadmi by increasing the allocations of funds to them. The Congress is focused on the aam aadmi – the one who does not drive two wheelers and cars. The BJP is focused on the urban middle-class. That’s why we see the BJP complaining about every petrol price hike. The timing of the next general elections is crucial. If the elections happen now, the Congress will lose (even though the BJP may not win). If the Congress survives until 2014, it could win again (even though nothing can be said with certainty!)…..


  1. What I believe Congress will come back again to power in 2014. What all points you have put forward are justified, and yes if Congress does feel there stand is not secure the winning trump card they have at any moment is RAHUL GANDHI - THE PM. Yes, they may not use him in 2014 if they feel they are going to win. Hinterland India definitely will move with emotion once we have another Gandhi as Prime Minister and we must bring him soon before the people who have lived the Indira and Rajiv era die. Cause the next generation may not have that much emotional connectivity with the Gandhi era as the previous one.

  2. Very good read! Never thought about it this way- Vikram.