Fuel for reform

Falling prices an opportunity for quick reforms in oil and gas

Plunging crude oil prices aren't just a boon for corporate India and the consumer. They are an invaluable opportunity for the government to push for faster reform of pricing and distribution distortions in the oil and gas sectors. The Indian basket of crude oil is trading below $43 a barrel, a seven-month low and less than half the price of July last year. At the start of the current financial year, the Union government had prepared its oil economy budget after assuming the crude oil price to be at $70 a barrel. So far the average price has been $55 a barrel - and, with global prices slated to slip to $40 a barrel, the savings for the rest of the year would be substantial. Moreover, by all accounts the convergence of global factors that has kept prices benign is likely to continue.

The beneficial effects of recent reforms to fuel pricing are already visible. In June 2010, petrol prices were deregulated. This was followed by an exercise to convert the cooking gas subsidy to a direct benefit transfer scheme that went all-India in January this year. And in October 2014, the diesel prices were deregulated. The impact on the petroleum subsidy has been significant: the budgetary outlay has more than halved in 2014-15. For the state-controlled oil marketing companies, the savings on under-recoveries - the difference between production costs and retail price - have been dramatic too. Under-recoveries dropped from Rs 1,39,869 crore in 2013-14 to Rs 72,314 crore in 2014-15. The government should now focus on the need to eliminate the remaining subsidies on petroleum products. To begin with, the subsidy on kerosene should be discontinued. Retaining subsidy on kerosene distributed through ration shops is dangerously illogical; having deregulated open-market kerosene prices in February this year, the temptation for arbitrage is high. The subsidy on cooking gas, mostly used by the better off, should also end.

Apart from the monetary gains, the elimination of subsidies has corrected the imbalance between diesel and petrol consumption in the transport sector, as is evident in lower sales of gas-guzzling sports utility vehicles; and reduced the incidence of kerosene adulteration of diesel. These advantages strengthen the case for the government to take reforms one step further to gas pricing and distribution. In a country that imports a third of its gas requirements outside the administered pricing system and urgently needs to reduce its excessive dependence on coal, a transparent and fair gas pricing regime is essential. Without it, big-ticket foreign investment will stay out, and a host of power and fertiliser plants will stay stalled. Cleaning up gas pricing might well have a positive domino effect on power and fertiliser subsidies, with which successive governments have struggled to cope. For an economy that urgently needs to address the twin challenges of accelerating investment and climate change, it makes little sense to continue with an administrative regime that is distortionary in its impact, especially when global and local factors converge to present a unique opportunity to reform.