On Slippery Ground

On the anvil are a 5-8 per cent hike in petroleum product prices, dismantling of the administered pricing mechanism (APM) for oil companies, delicensing of refineries, decontrol of domestic marketing of petroleum products, decanalisation of all petroleum product imports and a surcharge on profits of oil companies benefiting from the dismantling of APM.

Mercifully, the report seems to be pragmatic. The immediate increase in prices of petroleum products may be marginal, but the report is simultaneously tempered by imperatives of deregulating the oil sector. What is more, the Left along with key ministers of the UF government have found the recommendations to their liking.

 

But any celebrations over the likely end to the oil sector imbroglio can be premature. For, the recommendations may be pragmatic and may have been broadly endorsed by the UF constituents, but there may be many a proverbial slip between the cup and the lip. And given the UF governments fragile political equations, there is no guarantee that what is being said today will be honoured tomorrow.

This is critical as the package of oil sector reforms has been framed in such a manner that it has to be implemented in phases. For instance, the dismantling of the APM is to be undertaken only by the turn of century. The surcharge on profits of oil companies benefiting from the dismantling of APM will also be levied after 1999. Similarly, the reduction in crude oil import duty will take place in phases.

The UF governments logic is that the margin of immediate hike in the petroleum product prices should be brought down as much as possible so that there is no fresh increase in the oil pool deficit. The past burden of the oil pool deficit, estimated at Rs 15,500 crore as on March 31, 1997, would be liquidated by the remaining package of measures like the dismantling of APM and the levy of the surcharge on the profit of oil companies.

The obvious danger in agreeing to a marginal hike in prices now and postponing the more radical measures of reducing the oil pool deficit is that the UF government may fall an easy prey to populism. It will make the bold announcements about reforms accompanied with a marginal hike. Its political constituents will be happy, flex their muscles and tell their supporters that they managed to get the Mr Gujral round to agreeing to a lower extent of price hike.

But in this euphoria of a political victory, it is most likely that the more challenging tasks of dismantling the APM, decanalisation of petroleum product imports, phased cut in import duty and delicensing of the industry may be put on the backburner. The same UF leaders who today are swearing by the oil sector reforms package may become extremely reluctant to implement the remaining measures. The same financial pressure that exists today may not be there a year or two later. The UF leaders may just let these decisions gather dust in the governments cupboards. And who knows whether the same leaders still remain in power by the turn of century!

Oil experts, however, would argue that there is merit in a phased dismantling of APM, so that the industry may gradually get used to the new market-determined regime. It is, therefore, necessary for the UF government to bind itself irrevocably to the reform measures it announces at the time of hiking petroleum prices next week. The UF constituents should realise that this is one sector of the Indian economy, where the proposed reforms mean tremendous benefits for the public sector.

For instance, dismantling of APM in a single stroke should benefit all the public sector oil refineries immensely. In fact, in a market-determined regime, the new private sector refineries will have a huge cost disadvantage vis-a-vis the public sector giants. With historically low costs, the public sector refineries will reap full benefit of the open market prices, while the newly set up private sector refineries will not only contend with its higher capital cost, but also with the market fluctuations. In fact, this is the most opportune time for dismantling of APM, since the new private sector refineries are due to be set up in the next few years. A stable and market-determined regime would be in order for creating a favourable condition for fresh investments in this sector.

From the macro-economic point of view also, implementation of the proposed oil sector reforms is ideally timed. The Reserve Bank of Indias foreign exchange reserves are now estimated at about $28.5 billion. Official estimates place the public sector oil industrys external borrowing to meet the oil pool deficit at around $3.5 billion. Once the proposed oil sector reforms are implemented, the oil companies would be in a position to repay the $3.5 billion foreign loans, resulting in a decline in RBIs foreign exchange reserves assets by that margin. The impact of such repayment liabilities can be absorbed easily as long as RBIs foreign exchange reserves rule at as healthy a level as $ 28.5 billion.

The UF government could, therefore, notch up further gains for the economy if it consider expediting the implementation of the proposed oil sector reforms.