The untold oil reform

On June 25, New Delhi unveiled its boldest policy measure since the UPA coalition came back to power mid-2009 — it freed petrol prices and laid out a road map for gradually decontrolling diesel prices.

But, the really big decision made by the group of ministers (GOM) tasked with endorsing the Kirit Parikh Committee recommendations was kept under wraps. The GOM, a top government source says, accepted the panel's proposals on kerosene and LPG — in effect, indexing the price of kerosene to agricultural growth and, more relevant for BT readers, LPG (liquefied petrolem gas or cooking gas) to growth in urban per capita incomes. Two-thirds of India's estimated Rs 70,000-crore oil subsidy is spent on keeping kerosene and LPG prices down.

Why Under Wraps
The Rs 3-a-litre increase in kerosene prices — the first in eight years — and pricing deregulation of petrol and diesel led to country-wide protests by Opposition parties. Decisions to raise fuel prices hurt their core constituency — the middle class and the poor — the most, and they cannot but publicly oppose such moves. That is perhaps why the government did not make public its decision on LPG and kerosene.

What Next
The decision will for sure spark off another confrontation with the Opposition. Still, it is no doubt a step in the right direction. The Chief Economic Adviser, Ministry of Finance, Kaushik Basu has pointed out that the additional government borrowings to fund subsidies will, in turn, exert upward pressure on interest rates.

So, will the UPA government have the courage to stand its ground? A climbdown can never be ruled out but, for now, it seems the government is ready to push through this important policy reform.