Business Standard

Right call, wrong handling

Small, more frequent price hikes are better

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The prices of petroleum products have a capacity to spark a political firestorm that is matched only by those of onions. raised sharply in the wake of the first oil shock in 1973 and ignited an agitation that blossomed into the — which eventually grew enough to challenge the government. had a honeymoon first year in office, in 1985; but as soon as he raised fuel prices in January 1986, there were howls of protest — and, made of less stern stuff than his mother, he quickly rolled back prices. This history has been repeated several times since: when oil prices went up at the time of the first Gulf war, as prime minister kept dithering over a price hike till the country was on the brink of a foreign exchange crisis. The government has been similarly reticent, but has now sought to make up for lost ground with a near-12 per cent price hike for — which must rank as among the sharpest increases ever. In doing this, it has ignored the history of fuel price hikes and learnt nothing from the past.

There is a right way and a wrong way to increase fuel prices. The wrong way is to dither for months and then try to make up for lost time with a hard blow to the consumer’s solar plexus. The right way is to carry out small increases every month or two; pinpricks, even if more frequent, do not cause as much hurt as a hard punch, and are more easily tolerated. In the immediate case, it might be argued that, having lost time, the government had no choice but to go the whole hog, because the oil marketing companies have been bleeding and the government’s subsidy bill running ahead of the Budget. This is faulty financial logic. The oil companies would have got just as much, if not more, revenue if the prices of petrol and and cooking gas, and perhaps even kerosene, had all been hiked by two or three per cent; it would not have looked like a hammer blow, but the job would have been done, and another similar hike could have been announced after a month or two. As it happens, the smallest deficit that the oil marketing companies run is on petrol. By having provoked the inevitable criticism from different political quarters, including from so-called allies, the government has made it difficult to announce the more important price hikes in the other petroleum products, all of which sell in greater quantities than petrol.

Petrol prices have been nominally decontrolled, but they have not been de-politicised — as they desperately need to be. Power tariffs have been de-politicised by appointing independent regulators in states. In the case of petroleum products, a different technique is needed. The government should give the oil marketing companies pricing freedom, mandate that they must not subsidise across the board (some cross-subsidies may be inevitable), and mandate also that no price hike should be more than two per cent, and no two price hikes should have a gap of less than a month. Other than that, all petroleum duties should be specific and not ad valorem, so that central and state governments do not make undeclared revenue gains when prices go up.

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