It's time for India to bite the bullet on fuel price liberalisation

There is no alternative but to give the correct pricing signal to the market and consumers. Appeals and calls for conservation won't work

How many people would remember that the government dismantled the administered pricing mechanism (APM) for petroleum products in 2002 and announced market-based pricing for petrol and diesel effective April 1 of that year?

 

The fact that the government has not been able to implement this decision even after more than two decades is indication enough of the complexities involved. Unfortunately, this topic crops up for serious discussions only during crisis periods like the present one. Notwithstanding the fact that petroleum product pricing is a politically-sensitive subject, it is time for the government to bite the bullet, take hard decisions, and stick to them.

 

First, some facts. The proportion of oil and gas in the total energy basket has virtually remained the same over the last two decades — it was about 32 per cent in 2000 versus 31 per cent now. Despite the increased focus on renewables, various conservation attempts and plans to encourage electric vehicle (EV) adoption, domestic consumption of oil and gas is not going to go down in a hurry.

 

Our oil and gas import dependence has only increased over the period; currently, it is about 85 per cent and 50 per cent, respectively, of domestic consumption. India’s crude oil imports account for about 12 per cent of total global oil imports, and India is nowhere near being a price-setter in the international market.

 

Another important aspect of the oil and gas economy is that a significant proportion of the indirect tax revenue of the central and state governments comes from these commodities. This is one reason why they couldn’t be brought under the goods and services tax (GST) regime till now. The government also earns revenue through corporation tax and dividends from state-owned oil and gas firms.

 

The government faces a trilemma — keeping domestic prices low, not losing out on tax revenue, and containing the forex outgo and current account deficit. Challenging times, like the present one, pose a serious stress test to the system.

 

Naturally, there is a limit to which the public-sector oil marketing companies (OMCs) can be asked to absorb the losses. No one knows how long the current geopolitical situation would continue. Note that OMCs are listed companies, answerable to public shareholders.

 

As for the government, it hardly has any fiscal space to take on this burden. The Reserve Bank of India has limitations in supporting the rupee, which is bound to depreciate in such situations.

 

There is no other alternative but to give the correct pricing signal to the market and consumers. The appeals and calls for conservation won’t work. Inevitably, this would increase inflation, but that can’t be helped. Keeping the prices artificially suppressed has huge economic costs.

 

Going forward, the government must put in place a principle-based standard operating procedure (SoP) to deal with situations involving prolonged periods of high international prices. During such periods, the central and state governments should agree to take a hit on their tax revenues. Conversely, in the case of lower than normal international prices, governments could increase the tax rates.

 

Coordinated action between the central and state governments is crucial for achieving the desired objective. Bringing petroleum under the GST regime is not likely to happen in the foreseeable future. That said, the GST Council might be the right forum to build a consensus on the subject.

 

A feature of the oil and gas industry in India is the predominance of government-owned companies in the market. Undoubtedly, over the period, they have done a good job.  But no one can argue against the need for facilitating private-sector participation. There is another related aspect. With the state-owned OMCs holding almost the entire market share, the government is under public pressure to intervene, formally and informally, in pricing.

 

The government is being criticised for increasing petrol and diesel prices by ₹7 to ₹8 per litre within a short span of 11 days. The increase in domestic prices should have been effected gradually, in smaller instalments, spread over a longer period of, say, two to three months. The people would have got an early message and there would have been less public outcry. This would have presumably happened if a substantial proportion of the petroleum product marketing share had been with the private sector, with no monopoly of public-sector units.

 

As and when the situation normalises, the government needs to renew its efforts to get the private sector to participate in the oil and gas sector. The right approach would be to privatise one of the existing OMCs having a significant market share.

 

The government should take a fresh look at the proposal for the privatisation of Bharat Petroleum Corporation Limited (BPCL), which was planned a few years back but later dropped. Once a company of the size of BPCL, with over 20 per cent market share is privatised, it would completely change the petroleum product marketing scenario in the country. This would reduce the government’s role in pricing, and its predicament in handling situations like the present one. Over time, people will get used to market-based pricing.

The author is a former IAS officer who has worked in the Ministry of Petroleum and Natural Gas