Sunil Jain: Playing the flute

RATIONAL EXPECTATIONS

(flute), a headline like this one comes naturally! But there's more than low level punning to the headline since, in more ways than one, it describes just how the petroleum ministry is being run; it describes the actions of not just the petroleum ministry, but the poor management of the Congress Party and indeed, the entire government. The NDA, for instance, raised petroleum prices far more than the UPA has "" yet, neither the Congress nor the government capitalised on this. That's because the NDA put the hikes on managed auto-pilot, which saw prices being changed by small amounts 33 times (Atal Bihari Vajpayee addressed the nation to announce a nuclear test, not a price hike!); the UPA has seen half as many changes. Such was Vajpayee's finesse, even kerosene prices were raised 2.5 times, by the way, addressed without any fuss.

This rising gap between diesel and kerosene prices has meant the incentive for adulteration has increased "" 30-40 per cent of kerosene is reported to be adulterated with diesel, and this will get worse. Kerosene adulteration on a significant scale is what explains why the consumption of diesel has grown at a much lower pace than that of the economy over the years. It is also likely that the increased pollution that the CSE is reporting is due to this adulterated fuel, and not poor quality car engines. 
 

NDA VERSUS UPA: MORE HIKES, LESS NOISE (ALL PRICES AT DELHI)
		Petrol Rs/litre	Diesel Rs/litre	Kerosene Rs/litre	LPG Rs/cylinder	Crude Oil $ per barrel
NDA	Initial price	22.84	10.25	2.52	136.00	10.00
	End price	33.71	21.74	9.01	241.60	39.00
	Increase (%)	47.60	112.10	257.50	77.60	290.00
UPA	Initial price	33.71	21.74	9.01	241.60	39.00
	End price	50.56	34.80	9.09	344.80	130.00
	Increase (%)	50.00	60.10	0.90	42.70	233.30
NDA came to power on March 19, 1998 and UPA on May 22, 2004 Source: PPAC, Ministry of Petroleum

If this distortion wasn't bad enough, the low prices of diesel have encouraged industrial units to start using this in place of furnace oil and low sulphur heavy stock (FO/LSHS) "" since this can be up to a fifth of total output for some refineries, they are now exporting it at a loss. In the last one year, diesel consumption has shot up 11 per cent (as against a historical growth rate of 1-2 per cent per annum), and by over 20 per cent in the last quarter "" FO/LSHS consumption rose just 0.2 per cent.

The management gets further exposed when you consider the hike in prices came about only after the IOC chief said he had just two days worth of oil stocks left. Two days? As part of national security, the rule is that 45 days of oil stocks have to be maintained "" didn't anyone spot this major breach? Under Vajpayee, in fact, a decision was taken to double this. What happened to that?

There is then the issue of what these "under-recoveries" are that the oil companies/ministry keeps talking of. Till a few days before the oil price hike, a figure of Rs 245,000 crore was bandied about; but the PM spoke of only Rs 200,000 crore! On LPG, the gap was supposed to be Rs 350 per cylinder before the Rs 50 price hike; yet the PM spoke of just Rs 250 under-recovery remaining; on kerosene, a figure of Rs 36 per litre was mentioned while the PM said it was under Rs 20! Are the figures just made up on the fly? How are they calculated anyway?

One possibility is that the old method is still being used "" take the global price of a product, say petrol, and add to it the cost, insurance, freight and import duty to calculate the normative price. Then subtract this from the domestic price to get the under-recovery. While that works if petrol is being imported, India hardly imports any petroleum products, preferring to import crude to refine here. Also, a fifth or so crude oil purchases by the oil refineries like IOC are from ONGC at a price that's around half the international one "" is this taken into account while calculating the under-recoveries? Interestingly, one of the things the BK Chaturvedi committee has now been asked to do is to verify the actual under-recoveries!

Given this, is it time to move back to the old Administered Price Mechanism? It kept prices in check since there was none of the international bench-marking and less padding of costs. While it's true the idea of the dismantling the APM was to attract big amounts of private investment, this is clearly not happening "" indeed, Reliance, which started retailing petroleum products as part of this process, has now formally closed all its petrol pumps. Think about it.