More freedom

Need to deepen petro product pricing reforms

Stock prices of India's leading oil marketing companies registered smart gains last Thursday. The reason for the stock price uptick of up to six per cent was a decision taken by them the previous day to raise prices of petrol and diesel by over Rs 3 and Rs 1.90 a litre, respectively. The stock market's reaction was significant as it reflected its appreciation of what they perceived to be the newly gained freedom of oil marketing companies to fix the prices of petrol and diesel, which account for the bulk of their total sales.

The history of India's experiments with pricing freedom for petrol and diesel has been quite chequered. For a brief period in 2002, the government had given oil marketing companies the freedom to fix petrol and diesel prices, but that freedom was not real and the regime, too, was short-lived and abandoned unceremoniously. Government control returned and remained in force until June 2010, when oil companies were once again allowed to fix petrol prices. It, however, took 30 more months for the oil companies to formalise a system of reviewing petrol prices every fortnight. Diesel pricing, too, was freed from October 2014 soon after international crude oil prices began declining as that eliminated the need for government subsidies. It was then widely believed that the true test of the oil marketing companies' pricing freedom would take place when international crude oil prices move up and there would be pressure on increasing prices.

The imported crude oil price for Indian refineries (Indian basket) rose from $28.08 a barrel in January to $30.53 in February, after seeing a decline in as many as eight months in the current financial year so far. Retail prices of petrol and diesel in this period have broadly reflected this trend - going up during a few of the fortnightly reviews and declining on most other such occasions. That the petrol and diesel prices were raised by a good margin last week in spite of Parliament being in session and as many as five Assembly elections being due in a month's time showed the government's determination to stick to the pricing freedom it had granted to oil marketing companies - a resolve that is welcome and praiseworthy. Equally reassuring is the government action on mopping up some of the gains from falling crude oil prices by raising excise duty to meet its fiscal consolidation goals. That explains why even though the price of the Indian basket of crude oil has fallen by 72 per cent since June 2014, the retail prices have declined by a lower margin of 15-16 per cent in this period.

Going forward, the government must dismantle pricing controls in the remaining petroleum products, mainly cooking gas and kerosene. The government move to launch the Aadhaar-based kerosene supply system to 33 districts in nine states from next month should be replicated across the country after drawing the right lessons from the experiment. Similarly, the government must move forward with its intention to weed out the economically well-off customers of subsidised cooking gas, say those with an annual taxable income of over Rs 10 lakh. As Minister of State for Petroleum and Natural Gas Dharmendra Pradhan told this newspaper, the move to encourage people to voluntarily give up their cooking gas subsidies should now pave the way for a mandated limit on the use of subsidies by only those who belong to the economically weaker sections of society.