The next steps

Oil price reform gains may be lost without follow-up moves

The government's recent decision to reform the pricing regime for some petroleum products has already resulted in several spin-off benefits for the economy. Decontrolling diesel prices has meant that the total losses of oil marketing companies on account of this product alone in the current year would be capped at around Rs 12,000 crore, less than a fifth of what the companies incurred on it last year. Next year, the loss on account of diesel will be completely eliminated if the government refrains from interfering in its pricing, and allows the oil marketing companies to pass on to consumers the impact of any increase in international crude oil prices. Similarly, the cap on subsidy on cooking gas cylinders should keep a check on the losses on this count and the promised switchover to the direct benefits transfer scheme for payment of subsidies to the consumers should prevent any further leakage.

The government, however, needs to guard against complacency and take follow-up steps to build on the advantages gained from the decisions taken earlier. As expected, the deregulation of diesel prices has spawned competition in the oil retail sector, an area that had been shunned so far by private companies because of the administered pricing regime for petroleum products. Even as private sector companies prepare to expand their presence in the retail segment, it will be important for the government to consider imparting greater functional autonomy to the existing state-controlled oil marketing companies so that they can face the competition from the private sector. Since the present government is yet to take a political decision on privatising public sector enterprises, it would be important that necessary steps are taken in the interim to strengthen the managements of the state-controlled oil marketing companies and prevent the repeat of what happened in the telecommunications and the aviation sectors, where the entry of the private sector led to the gradual withering away of the state-owned enterprises in those areas. The benefits of competition would flow to consumers also when state-controlled oil marketing companies are encouraged to abandon the earlier practice of co-ordinated price determination. On its part, the government should review the criterion of a minimum capital of Rs 1,000 crore stipulated for entry of retail players in the oil sector. By reducing the minimum capital requirements, the government will encourage the entry of more players in this segment and prevent any oligopolistic market behaviour.

The subsidy burden on each cooking gas cylinder has been capped, but the total loss will continue to be large, estimated at around Rs 50,000 crore in the current year. This would account for almost half of the total such under-recoveries of the oil marketing companies. With the cap on the number of subsidised cylinders to be supplied to each household remaining at 12 a year, the actual benefit is limited. Indeed the demand for subsidised cooking gas has seen a spurt of late and the government would do well to switch over to a small monthly price increase for cooking gas to free the oil marketing companies from this burden as well in the next few months. That would leave only kerosene as a major cause of under-recoveries for the oil companies. A similar approach, of a small monthly increase in kerosene prices, should also help clean up the petro-product pricing mess. The current crude oil price situation is an opportunity - and should not be lost.