Reform fuel pricing

Govt must follow a transparent mechanism

The government’s approval of the full privatisation of Air India has raised expectations that the disinvestment of Bharat Petroleum Corporation Limited (BPCL) may be carried out effectively and as planned before the end of this financial year. Yet there are broader questions about the management of the fuel economy that must be asked at this point. The biggest question surrounds the management of the prices of petrol, diesel, and liquefied petroleum gas or LPG. The fact is that, while these prices have technically been freed up in recent years, in the same period price changes have often been put on hold in times of political sensitivity, such as before a crucial Assembly election. There is little doubt that the three state-controlled oil marketing companies (OMCs) continue to be given pricing guidance by the Union government, even if the administered price mechanism has been wound down and companies allowed to set their own prices at the pump. 

A successful bidder for BPCL will want to set prices to maximise profits — and, indeed, would be justified in expecting that the broader market for fuel is not being undermined by government policy towards the two other OMCs. At the moment, given the global run on the price of crude oil and high domestic taxes, the old problem of “under-recoveries” — an enforced per-unit loss on sale of petrol, diesel and LPG — seems to have re-appeared. OMCs are not only having to manage under-recoveries, according to reports, on every litre of petrol and diesel sold, but also have to deal with a loss of Rs 100 or so on every gas cylinder sold in the household retail market. This system cannot be allowed to endure beyond the disinvestment of BPCL. If a profit-seeking BPCL sets a cost per litre that is in keeping with commercial reality, it will find itself undercut by OMCs that continue to take direction from the government on pricing, which naturally would create an unsustainable market. The household LPG market is even more problematic, with the government insisting that mandated prices for cylinders will stay; and the government yet to reimburse OMCs the sums they have lost under the Pradhan Mantri Ujjwala Yojana, which add up to Rs 3,000-4,000 crore. 

The government has, on the one hand, tried to maintain some elements of price control, while on the other hand it has turned to fuel taxes to fill the giant gaps in its revenue. There is no argument that a high tax on carbon is a good thing, but it should be logical and economy-wide and not scattershot and imposed largely for fiscal reasons. Effectively, the government has sought to squeeze not just consumers but also, for political reasons, the companies that serve as intermediaries. A more rational fuel pricing system is overdue. The outline of such a system has long been known: Direct transmission of global fuel prices to consumers, with OMCs competing on the margins; a consistent fuel tax that is in keeping with the shadow price of carbon and is shared between the Union and the states; and direct subsidies, out of the Union Budget, for those sections of society that are most vulnerable to fluctuating or high prices for petrol, diesel and LPG. The disinvestment of BPCL is the right time to introduce this long-term tax and pricing reform.