Increase petrol prices, subsidise other fuels

For a beleaguered UPA government, increasingly under fire from the Left and the Opposition over galloping inflation, the sharp rise in global crude oil prices couldn’t have come at a more inopportune time.

The under-recoveries of the oil marketing companies (OMCs) are mounting and there are very real fears that they may soon run out of money to import crude with. Worse, there seems to be no immediate possibility of a respite from high global oil prices, which are currently hovering around $135 (Rs 5,805) per barrel. Global financial powerhouse Goldman Sachs estimates that crude is likely to strengthen further to $200 (Rs 8,600) levels soon.

The time has come to bite the bullet and take some tough decisions. Shielding the economy from soaring crude prices will require substantially higher issuance of oil bonds. But there will still have to be some passthrough to consumers. The Indonesian government, for instance, recently announced a 30 per cent increase in pump prices despite stiff opposition.

At the time of going to press, there was speculation in the media about the possibility of a massive increase—of Rs 10-16 per litre—in the price of petrol. But given the drubbing the Congress has received in the Karnataka elections— and the fact that several more elections, including the General Elections, are due over the next 12 months— it is unlikely that the government will muster the political courage to go this far.What then, are the other options before the government? One way could be to levy a 3 per cent oil stabilisation cess on the lines of the education cess. This could yield up to Rs 20,000 crore per annum, which can be used to fund the under-recoveries of the OMCs.

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However, given the huge losses being sustained by them, this alone may not be adequate. A combination of this, a duty cut on crude and petroleum products and a price hike seems to be the only way forward.

The government should simultaneously use the crisis to push through some critical reforms in the petroleum sector. The most important step in this direction will be to grant oil companies the freedom to fix market prices for petrol, while persisting with subsidies on other fuels like diesel, kerosene and cooking gas to protect the interests of the poor.

But can we expect our political class to rise above rank political opportunism in national interest? Given its track record, it’s perhaps asking for too much.