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Petrol pricing in different years  

Petro pricing: Spot the difference

Circa 2002: “... the finance minister has announced the dismantling of the administered price mechanism in the petroleum sector from April 1, 2002. The pricing of petroleum products will become market-determined ... LPG and kerosene would continue to be subsidised with a fixed subsidy from the government for another 3-5 years.” — Honourable petroleum minister Ram Naik, NDA (Global crude oil price $26.88 per barrel)

Circa 2010: “... the government has decided that the pricing of petrol and diesel both at the refinery gate and the retail level will be market-determined ... Further increases will be made by PSU oil marketing companies (OMC) in consultation with the ministry of petroleum and natural gas... Market-determined pricing of petrol and diesel is expected to do away with the OMCs’ under-recoveries on these two products... PDS kerosene and domestic LPG, the government has decided that the subsidies on these products will continue .” — Honourable petroleum minister Murli Deora, UPA-II (Global crude oil price at $78.86 per barrel)

The obvious difference between the two announcements — proclaimed landmark reforms in the country’s energy sector — is the difference in the time, the government in office and, most importantly, the global crude oil prices. But the similarities in the two official announcements that come almost exactly after eight years (March 28, 2002, and June 25, 2010), prompt more questions than answers. First: why is a stated policy being reiterated? The answer, as most know, is simple. The price decontrol in the petroleum sector remained more on paper than in practice.

Barely a fortnight after the UPA government made this grandiose reform announcement — which followed discussions and debates and yet another committee report, this time by Dr Kirit Parikh — the autonomous (sic) oil companies after a meeting amongst themselves and the ministry decided to review prices of petrol only — as opposed to both petrol and diesel — on a monthly basis, which they would announce after consultation with the parent ministry. Odd isn’t it? These very companies have been crying hoarse in private about how selling fuel at government-controlled prices erodes their profitability completely. More importantly , the controlled pricing regime impacts competition in the sector, which leaves the consumer with little choice. Also , not to mention the uncertainty for the upstream oil-producing companies like ONGC and OIL that have to bear a part of the subsidy burden. At last estimate, ONGC is to bear a subsidy burden of Rs 6,000 crore for the first quarter of 2010-11 .

The government needs to allow market pricing to ensure competition that will benefit the consumer with better services and prices. Private oil companies that had made a modest beginning with retail outlets were selling higher amounts per pump partly because of better efficiency. Also, market pricing will disincentivise adulteration of fuel which is rampant in the industry . Greener fuel like those blended with ethanol would find a play in the market. The recommendations of the Parikh committee (earlier Rangarajan and Chaturvedi committee) of establishing a transparent subsidy-sharing regime surely have been put on the back burner as of now. Diesel prices, the petroleum ministry has announced, will remain under the government purview. So, what was the major achievement as far as the petroleum-pricing reform was concerned? The constraints faced by the present government are understandable.

ONE , as is clear, global crude oil prices are still ruling firm, and have been volatile for the last few years. With India importing close to 80% of its energy requirements , high crude oil prices are always a huge challenge for the government . The risk of a high import bill, the pressure on government borrowings and the risk of fiscal instability if consumers are to be insulated from the price spikes is always there. Not to mention the high inflation — inflation today is ruling at 10.55% against 4.87% in 2002 — and the impact of high fuel prices. But continuing with high subsidies, which have to be funded through government budget or increased borrowings, also leads to a greater danger of consumption indiscipline.

For India, which spends billions of dollars in importing crude oil — the raw material that is used to make petrol diesel, aviation fuel, cooking gas or kerosene, among others — it is a luxury to dole out subsidies to the richie-richs of the society. Consumers who spend a bomb in buying the latest car surely can pay a few rupees more on the petrol or diesel they buy. The artificially-low prices of petrol and diesel have also hampered growth of public transport. With most big cities in the country working on metro rail projects, consumption of liquid motor fuel should come down. If developed countries can make it mandatory to adopt car pooling to save energy and reduce emissions, it is almost a necessity for an energy-dependent country like India.

To be fair, the NDA government, thanks also the advantage that global crude oil prices were far lower, allowed oil companies flexibility in fuel pricing for the first two years: the periodicity was fixed, revision every fortnight in line with global markets, and the products decontrolled were petrol and diesel. This is not saying that the petroleum ministry and its babus did not monitor or check what the oil companies were doing. In fact, senior officials of the PSU oil companies were regulars at Shastri Bhavan every fortnight to get the green signal from the political master before the price revision was made public.

But as global crude oil prices moved up, the autonomy given to oil companies was gradually taken away and the government took upon itself the job of fixing retail prices of all fuel, cooking or transport. What’s more, there was no official announcement or statement that the decontrolled regime had been paused. So, for investors looking into India’s petroleum refining and marketing sector, the policy on paper was very misleading.

Decontrolling petro-pricing does not reduce government control. It has been decided that in case of a large increase or volatility in international oil prices, the government will suitably intervene in the pricing of petrol and diesel. But this needs to be defined as to when and how — this has been left unsaid. An answer to this question will be provided depending on how far an election is. For, isn’t petro-pricing all about vote-bank politics?

………..Soma Banerjee / The Economic Times

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