No pass through

Govt dilutes its policy on decontrol of petrol, diesel prices

On Tuesday, the government took advantage of weak global oil prices and raised the excise duty on petrol by Rs 2.25 a litre and on diesel by Rs 1 a litre. In many ways, the instinct of the government is correct. Indeed it should extend this principle further to impose customs duty on imports of crude oil. Worldwide, carbon products are moving to higher-tax regimes, in order to encourage energy conservation and curb emissions. The Indian government must do its bit and at the same time take advantage of the softening international crude oil prices to shore up its finances by slashing energy subsidies. There is the yawning fiscal deficit, which the government promised will be contained to 4.1 per cent of gross domestic product, or GDP. The increased excise will be between Rs 4,000 crore and Rs 4,500 crore, and will help in the deficit-cutting effort. This follows a similar increase in excise duties last month, of Rs 1.50 a litre on both petrol and diesel, which will bring in over Rs 10,000 crore. There is additional political cleverness here: a higher duty gives the government some room to soften or stagger the domestic price increases at pumps when the global price of crude oil returns to around or over $100 a barrel.

The problem is the government has also effectively gone back on one of the few concrete reforms it has conducted in its tenure. After trumpeting its commitment to the deregulation of prices, it has violated the spirit of deregulation, and what that reform was supposed to achieve. The increase in excise duties will not be passed on to consumers, according to the oil marketing companies (OMCs). These OMCs are, of course, state-owned; and it strains credulity to suppose that this decision, which is clearly not in their commercial interest, was not born of political pressure. If the government is forcing the OMCs to set prices according to the dictates of political masters, then it can hardly claim deregulation has happened.

The implications of this decision are manifold. First of all, it hurts public-sector companies. Prime Minister Narendra Modi has not been publicly enthusiastic about privatisation, preferring to insist his government can run public-sector companies efficiently. Such decisions work in the exact opposite direction from what the prime minister claims. Secondly, it means that private-sector entry into the oil marketing sector - what was supposed to be the consequence of deregulation - is unlikely to happen. Any private company would have passed the excise hike on to its consumers - and rendered its pumps uncompetitive when compared to the public-sector ones. Constant downward price pressure from the politically controlled public-sector behemoths would render the private sector unable to compete.

That this is a political and not an independent commercial decision is evident from the obvious cartelisation - all the fuel retailers have decided to not pass on the excise hike. It is perhaps a fit case for the Competition Commission of India to take note of, as it dissuades the entry of competitors. And the government should stop pretending it has deregulated fuel pricing.