Decontrol retail prices of oil

After much dithering, the government finally summoned the courage to increase fuel prices. With crude prices crossing $130 (Rs 5,590) per barrel, there was an air of inevitability about the decision. But trust our politicians to act difficult on an issue that is clearly ballooning into a major crisis for the global economy. The BJP accused the ruling UPA of unleashing “economic terrorism” on the people, while the Left was swift to call it a needless decision. Amidst the hue and cry, a simple fact has not hit home. The recent price revision is too little too late.

Consider this: after factoring in the price increase and the duty cuts, the under-recoveries of the oil marketing companies (OMCs) will stack up to a staggering Rs 2,00,000 crore, assuming crude prices average $125 (Rs 5,375) per barrel through 2008-09 (by no means a given).

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And with crude prices headed north—it is expected to cross $150 (Rs 6,450) a barrel within a month—this figure will only mount. This will once again push the OMCs to the brink and could call for another bailout package. At last count, the fiscal deficit of the Centre (including off-balance sheet items such as the oil, food and fertiliser subsidies) was projected at 6.6 per cent of GDP in 2008-09. The oil bonds alone will add 1.8 per cent to this. Thus, there’s little cushion for any more molly-coddling.

Already, other Asian countries, most of whom subsidise the retail prices of fuels, have opted for bigger price hikes to deal with the situation. The Indonesian government, for instance, recently announced a 30 per cent increase in pump prices in the face of stiff opposition. Sri Lanka has raised prices of kerosene, gasoline and diesel by 14-47 per cent, and Bangladesh Petroleum, that country’s sole oil importer and distributor, has proposed fuel price increases of 37-80 per cent.

The recent 10 per cent price increase in India appears almost pusillanimous in comparison. Clearly, the government is running out of soft options. Fuel prices have to be decontrolled. The Centre already has a roadmap chalked out for it by the Rangarajan Committee on Pricing & Taxation of Petroleum Products, which has argued that subsidies should be minimal, targeted and restrained by a monetary ceiling. Passing on a greater burden to consumers will also have another positive fallout. It will curb consumption and give a fillip to oil conservation efforts. But can this government, or future ones, muster the courage to bite the bullet and go the whole hog down this route? Given the fractured nature of the Indian polity, that appears unlikely.