Petroleum product pricing regime still needs to be reformed
Urban middle-class India is in a celebratory mood. The United Progressive Alliance (UPA) regime at the Centre is all set to reduce petroleum product prices once again. A reduction in the prices of petrol and diesel— by Rs 5 and Rs 2 a litre, respectively— was announced on December 6. A second round of price reduction is proposed to be more comprehensive and is expected to please more people— a cut in petrol and diesel prices by a similar margin and a reduction in the price of liquefied petroleum gas (LPG) by Rs 20 a cylinder of 14 kg.
The conventional logic used by the UPA policy makers in support of this move is that the international crude oil prices have been consistently falling over the last few weeks and have ruled at below $40 a barrel for some time now, down from over $140 a barrel in July 2008. The state-owned oil refining and marketing companies may no longer be incurring any losses at present. The daily under-recovery (or losses on account of subsidised selling prices of petroleum products) for these oil companies was estimated at Rs 10 crore a day when the price of the Indian basket of international crude oil was $42 a barrel. This price is now estimated at around $36 a barrel and the oil companies may well be making a daily profit now! So why not share the oil companies’ profits with the people of India?
Note that nobody in the UPA government is now talking about the need for reforming the petroleum product pricing regime. All that we hear is the need for providing some relief to the inflation-hit people of this country. If that can come about even after throwing basic reforms to the winds, so be it. Reforms, once embraced as the main spirit of governance by the troika of Manmohan Singh, Palaniappan Chidambaram and Montek Singh Ahluwalia, appear to have been cast aside and completely forgotten. Who cares about dismantling the administered pricing regime for the oil sector when more important reform goals— for instance, of reducing the fiscal deficit— have ceased to be the government’s priority?
Many sensible recommendations to strengthen the petroleum product pricing regime were made by at least two recent government committees— one headed by Rajya Sabha member C. Rangarajan and the other by former cabinet secretary B.K. Chaturvedi. Nobody in the government talked about these recommendations when the international crude oil prices ruled at around $140 a barrel. It was widely acknowledged that implementing them when the crude oil prices were that high would have added fuel to the fire of inflation and made the government more unpopular. But the irony is that now that the international crude oil prices have dropped by over 70 per cent, nobody in the government is talking about reviving the recommendations of these two committees and considering them for implementation.
Instead, the UPA government has opted for an easy way out that is populist and steers clear of any controversy. What has been overlooked is the fact that international crude oil prices will not remain at these current moderate levels for long. As long as they remain moderate, the government should use that as an opportunity to put in place a transparent pricing system that reflects the actual cost of the petroleum products. It will be easier to implement the new system now than when the crude oil prices start rising. The Vajpayee government too had got a similar opportunity, but its petroleum minister Ram Naik did not take full advantage of it.
The UPA government and its petroleum minister Murli Deora should learn from the Vajpayee government’s mistake. Politically, it may be too complicated and almost impossible for the UPA government to put in place an elaborate package to reform the petroleum product price regime at present. After all, general elections are round the corner and it is not reforms but hand-outs that will fetch greater returns. Yet, there could be a prudent approach to the oil pricing issue and a pragmatic method that could be populist and at the same time do the least damage to the oil economy.
That strategy would be to reduce the prices of only petrol and diesel, and at the same time raise the prices of LPG and kerosene. The current under-recovery on account of LPG is almost half its selling price and the under-recovery on account of kerosene is more than double its current selling price. The subsidy levels that under-recoveries of such magnitude require are huge and unsustainable. Therefore, raising the prices of LPG and kerosene would reduce the subsidy burden and also prevent the diversion of kerosene and its adulteration with diesel. At the same time, a reduction in petrol and diesel prices would offset the impact of a rise in kerosene and LPG prices on inflation.
The petroleum product pricing regime would still need to be reformed. But at least the under-recoveries on account of LPG and kerosene would become less unsustainable.
In spite of the RBI's rate cut and the Centre's reforms, any recovery will only be half-hearted