Towards better pricing

An opaque system can undo oil price decontrol benefits

It is not often that petrol prices in India see a downward revision. In the last five years, petrol prices have been cut only on five occasions, with the last revision taking place on Wednesday. The significance of the latest price cut of about three per cent, however, lies not so much in the low frequency of such instances as in its timing. Less than a fortnight ago, oil companies had raised petrol prices by 2.7 per cent, which was the 13th such increase since the government decontrolled its pricing in June 2010. Coming as it did when wholesale price index-based inflation was close to double digits and food inflation was even higher, the petrol price increase had expectedly evoked loud protests from various political parties, which demanded a reversal of the decision. But in an unusual show of courage and forthrightness, the government held its ground arguing that after decontrol it had nothing to do with the pricing decision of oil marketing companies. It is a comment on the political sensitivity of the matter that in spite of the government’s public stance, some leaders of the Congress party seemed uncomfortable with the decision. Its partner at the Centre, the Trinamool Congress, even threatened to pull out of the alliance if the increase was not rolled back. After a few rounds of consultation, however, the Trinamool Congress toned down its threat and it appeared the political controversy over the petrol price increase was over.

Against this background, a reduction in petrol prices comes as a surprise and, if oil marketing companies are to be believed, the surprise should be welcome. According to them, the decision to reduce petrol prices is not a rollback under any political pressure, but a reversion to the practice of a fortnightly review of petrol prices depending on the movements in international crude oil prices and the Indian rupee’s exchange rate. In other words, if the average international crude oil prices moved up in the second half of November and the Indian rupee saw further depreciation against the US dollar, the oil marketing companies would go ahead with a petrol price increase in the first week of December, in keeping with its fortnightly price review cycle. If indeed the oil marketing companies can go ahead in December with a price revision, the government would deserve a pat on its back for sticking to its decision on decontrolling petrol prices in letter as also in spirit.

However, doubts about whether the freedom for oil marketing companies to fix petrol prices is real persist, not least because of the opaque manner in which the retail selling price for petroleum products continues to be determined. The average price of the Indian crude oil rose in the first half of November, but the oil companies argued that international petrol prices dipped in this period, which had an impact on the import parity price for the product. Similarly, even as petrol prices were cut, the price for aviation turbine fuel was raised, presumably because its import parity price had also moved up. Clearly, it is just not enough for the government to decontrol petrol prices. It is equally important to introduce a transparent system of pricing petroleum products. Why aviation turbine fuel price should be 50 per cent higher than that in other developed markets should not remain shrouded in secrecy.