Oil slick

The govt has been brave, but where is deregulation?

Petroleum product prices usually get hiked shortly before the Budget is presented, and the government has been true to form in announcing the hard decisions ahead of the big day, so that the finance minister can be considerate when it comes to taxation. The price hike this time is larger than usual, but leaves out what are considered the more politically sensitive segments, kerosene and cooking gas; these of course happen to be responsible for the bulk of the petroleum sector’s subsidies. Missing in all the action is the petroleum minister’s month-old promise of price deregulation, which would have achieved the urgent task of de-politicising petroleum product prices and making them creatures of the market, like most other goods.

Even after the hike, there is a subsidy that the oil sector will bear. At the present level of international crude oil prices, the shortfall (or “under-recoveries”) for the oil companies has been estimated at Rs 70,000 crore. Wednesday’s hikes have reduced this deficit by Rs 13,000 crore. If the oil companies absorb a half of the burden through a reduction in profit margins, the government could be left with a bill that is equal to about 0.5 per cent of GDP—less than a third of what it was last year.

Still, it is time to question the touch-me-not status that has been accorded to the prices of cooking fuels. Liquefied petroleum gas, or LPG, is used mostly by middle-class households which can afford a gas stove and pay the deposit on a cylinder. There is no reason why such households should be given a subsidy of over Rs 90 per cylinder, especially when gas is a cheaper cooking fuel than any of the alternatives. As for kerosene, its price was last raised in 2002; at Rs 9.50 per litre, it now costs less than mineral water. At this price, a significant part of kerosene goes into the adulteration of diesel—which is one reason why the figures on the growth of diesel consumption are moderate. It is worth recalling that the Vajpayee government had raised the price of kerosene in stages, from Rs 2.52 per litre to over Rs 9, which goes to show that its price is not as politically sensitive as is usually portrayed.

If price decontrol is not on the cards any more, the government needs to get some sanity into how the “under-recoveries” of the oil marketing companies are calculated. The numbers are based on the difference between global prices and local prices, but several local inputs (such as the crude sold by ONGC to the oil marketing firms) cost much less than they do globally. Indeed, though no fuel products are imported, notional freight and insurance costs are added to arrive at benchmark prices. All of these pad up costs, allowing the oil companies to claim losses that they have not incurred.