The United Progressive Alliance government’s stance on complete and effective deregulation of the administered price regime (APR) in the petroleum sector is better described as procrastination than as postponement. To postpone is “to defer to a future or later time; to put off”; to procrastinate is “to put off doing something, especially out of habitual carelessness or laziness, often due to a fear, conscious or otherwise”. What implications does this de facto policy of procrastination have for oil subsidies and the oil sector, fiscal deficit and the general economy?
The partial deregulation of APR in petroleum products has brought in its wake developments that were anticipated. Oil subsidies have ballooned and the government’s budget has been thrown out of whack.
In the first three quarters of this year alone, oil subsidies were Rs 30,000 crore over and above the budgeted Rs 23,000 crore . Oil marketing companies (OMCs) incur daily under-realisations of Rs 388 crore in the sale of diesel, kerosene and LPG — a cumulative total of Rs 64,900 crore between April and September 2011, leading to expectations of all-time high under-recoveries during 2011-12.
Fertiliser subsidies are likely to be twice the budgeted Rs 50,000 crore. Rising fertiliser prices contribute to food inflation. We often forget that virtually our entire fertiliser consumption is derived from fossil fuel. Taken together, these factors have caused the government to ask Parliament for an enhancement of Rs 1 lakh crore to its spending and borrowing limits. The numbers could scarcely be more worrisome.
Petrol pricing was “freed” last June. OMCs now set the price — but reportedly after political clearance. Diesel, kerosene and LPG pricing continues to be fixed. In setting the retail price, the government is essentially deciding how much subsidy to dole out to markets and constituents. While diesel subsidy is rationalised by the argument that increases will feed into the general price level via transport prices, cooking fuels are to be subsidised until cheaper alternatives are available.
Expectedly, the partial deregulation has led to a further widening of the price differential between petrol and diesel. This is expected, because discerning observers of global oil markets are aware that energy prices in general – and oil prices in particular – will continue to rise for a while. An import content of about three quarters in our crude basket and a dramatically falling rupee only exacerbate the situation.
OMCs are raising petrol prices to keep pace with rising international levels. A government that behaves as if it is cornered is, on the other hand, raising subsidies on diesel and cooking fuels to soften the blow on the supposedly less affluent. How much longer can this balancing act be maintained? It is a different matter that there is a concomitant increase in sales of luxury cars using subsidised diesel. Collateral damage or collateral benefits?
It has been said that what cannot go on forever does not. It is unlikely that the UPA’s economic heavyweights are in the dark about this simple dictum — coincidentally from a fellow economist, Herbert Stein. What then explains this delay in swallowing the bitter pill of complete deregulation and rationalisation of fossil fuel pricing? The answer lies in the political compulsions that the government feels it is constrained by.
To be fair, the government does find itself in a bind. With a constant flow of elections it feels compelled to pander to the short-term demands of the electorate rather than face the issues on their merits, squarely. Add to this an Opposition that cries foul to gain popular support, exploiting the exigencies of the circumstances while unwilling to partake in responsible governance with the interests of the country close to their heart. They are on the streets every time there is a rise in fossil fuel prices, as if the government is responsible for not fossilising more fuel a few hundred million years ago!
The constant election cycle and an irresponsible Opposition make the already thorny duty of the government tougher. But leadership is, after all, not about pandering to your constituents, but doing what is in their long-term interest. The steps that such leadership requires need not be easy or palatable. And raising awareness amongst voters about the exigencies on the energy front will leave the Opposition becalmed.
In the absence of doing the right thing, what is likely to result is fire-fighting. India, as a nation, is going to receive a rude awakening about its energy management, pricing and allocation policies soon. This will not be pretty, and will involve a dramatic re-pricing of fossil fuels, fertilisers and food. Remember, the inflation we witness today is in large measure a fallout of the ballooning subsidies and mounting public debt.
If, instead, we do swallow the bitter pill today and allow rationalisation of petro-product prices, we have more degrees of freedom and time. We can put in place effective modes of fuel-efficient public transportation, to name one big step. This will ease the transition for those impacted by rising prices.
The world has to deal with not only the geological reality of depleting supplies of fossil fuels, but also the geopolitical conflicts that will result. The ongoing entanglement over the placid waters of the Strait of Hormuz is a case in point.
India cannot isolate itself from international energy sector developments. They will impact us economically, politically and socially. However, formulating rational and realistic energy pricing policies will add to our resilience.
The writer analyses macro and energy risks at Hyderabad-based ValueLabs
