Slipping on oil

Time to create durable pricing reforms

Winds of change have begun blowing across India’s petroleum sector, even though the speed is excruciatingly slow and the direction often confusing. In August 2009, the United Progressive Alliance government had decided to set up an expert group to recommend a viable and sustainable system of pricing for petroleum products. Six months later, Kirit Parikh, a former member of the Planning Commission and the expert group’s chairman, submitted his findings which, for the umpteenth time, reiterated the need for complete deregulation of petrol and diesel pricing. It took another four months for the government to act on the expert group’s recommendations, apparently in a half-hearted fashion. Petrol prices became free with its price going up by 7 per cent, but diesel prices remained under government control. The government ignored many other valuable suggestions of the expert group, but the oil marketing companies heaved a sigh of relief as they now had the government permission to raise prices of diesel by 5 per cent, kerosene by 33 per cent and liquefied petroleum gas by 11 per cent.

The glacial pace of change in oil sector reforms was also evident from the manner in which the oil marketing companies took another three months to effect the first change in petrol prices under the deregulated regime, even though there was enough justification to increase them much earlier. The average price of the Indian crude oil basket was above the benchmark $75 a barrel in August and September, and as the Kirit Parikh committee had reckoned, the oil companies should have been free to raise petroleum product prices whenever the international price crossed that level. Yet, only one of the state-owned oil marketing companies has so far raised its petrol prices, while others are still to decide what course of action to adopt, although private oil marketing companies have already begun selling petrol at prices well above those maintained by their counterparts in the state sector. This may well be the first sign of a truly deregulated petrol price regime where the oil marketing companies compete with each other with different prices, but celebrations over this could be premature. The memories of how the experiment with the dismantling of the administered pricing mechanism for the oil sector from April 2002 failed in less than a few months are still fresh. There is no systemic guarantee that the government will not relapse into the administered price regime once international oil prices start rising again and the consequent increase in petrol prices exerts enough pressure on inflation, forcing a politically weak government to roll back the reforms.

An interim measure to pave the ground for more durable reforms in the petroleum sector would be to implement the remaining suggestions made by the expert group headed by Kirit Parikh. These include deregulating diesel prices and a more realistic mechanism for periodic increase in prices of kerosene and LPG. Remember that small periodic increases in petroleum product prices in line with the international crude oil market create fewer political problems. This will also ensure that years of inaction on raising prices of these politically sensitive products does not become a big fiscal burden for the government. Already, the total under-recoveries for the oil sector, after taking into account the June increase in prices of various products, are estimated at over Rs 53,000 crore, which will have to be borne by the oil marketing companies and upstream oil companies. If the remaining recommendations made by the Kirit Parikh committee are not considered and implemented soon, the slow but tenuous gains made in the last few weeks are likely to be frittered away.