T N Ninan: Oil's beneficiaries

WEEKEND RUMINATIONS

For the last three decades, oil has been seen as a source of trouble for India. Virtually every economic upheaval since the mid-1970s, whether a sharp spurt in inflation or a sudden foreign exchange crisis, has been linked to a spurt in international oil prices.

As a result, most domestic observers have come to assume rather automatically that high oil prices are bad news. May be it's time to think again.

For a start, the Indian economy is not a loser. Almost every dollar that India pays out to its oil suppliers comes back in the form of remittances from the Gulf countries. These remittances are close to 3 per cent of India's GDP, most of it comes from the Gulf countries, and the figure pretty much matches what we spend on oil imports.

In other words, however high the oil price might be, it gets paid for when the earning and spending cycle is complete. If, in a different scenario, world oil prices were low and the Gulf countries had less money to spend on their own development, they would not be employing millions of Indians and there would be no inward remittances. In fact, the jobs are another positive spin-off.

Nearly 3.5 million Indians have found work in the Gulf because of the surfeit of petro-dollars in the region. These are people who make far more money than they could dream of in the home country; most of them have only basic skills as fitters, carpenters and shop assistants.

So, over and above the remittances, there is the fact that as many people as the central government employs on its rolls have found work in the Gulf countries. That's not a small blessing.

Even that is only part of the story, because the Government of India is a big and direct beneficiary too. As this newspaper highlighted in a series of reports earlier this week, the central government has milked the oil sector like nothing else, and collects as much as a fifth or more of its total tax revenue from the oil companies "" in the form of excise and customs duties, and as tax on their profits. The state governments take their pound of flesh too in the form of a variety of cesses.

In all, the oil sector pays the different governments something in the region of Rs 70,000 crore "" many multiples of what any other sector of the economy delivers in taxes and cesses. Indeed, if oil did not cough up this revenue, it is hard to see where the government could turn for equivalent money.

It is of course possible to argue that the government could collect this money even if oil prices are low, but that is not strictly the case "" because most of the taxes are ad valorem. That is, they are a percentage of the oil price. If the oil price falls, the government gets less money. It is almost as if the government benefits from high oil prices.

Then there are the oil companies themselves "" and the many Indian shareholders of giant companies like Indian Oil and ONGC, not to speak of Reliance. That these are three of the five largest and most profitable companies in the country, has something to do with the way oil prices behave. All three companies make handsome profits, and some have enviable profit margins as well.

Did you know, for instance, that ONGC has a better profitability ratio (i e, profits to sales) than even the software giants like Wipro and Infosys? This is possible only because it gets paid a price for its crude that is linked to the global oil price.

If global prices fall, ONGC would be much less profitable "" and its investors would not be quite as happy as they have been. As this newspaper has reported, the oil companies make almost as much money from refining and marketing oil and oil products, as the Arab sheikhs who pump out the crude from oil wells.

In short, while they would not care to admit it, lots of important players in the system must be perfectly happy with high oil prices because it suits them. The consumer ends up paying more, of course. But then, lots of people gain one hell of a lot.