A difficult choice
Policy paradox: Political challenges won’t allow oil prices hike
It is a government-appointed committee report that has created a piquant situation for the government. The Prime Minister-appointed Kirit Parikh Committee has recommended a sharp rise in retail prices of kerosene, petrol, diesel and domestic cooking gas and total decontrol of auto fuels at a time when the government is pre-occupied with the daunting task of reining in runaway inflation.
Given the fact that pricing of petroleum products is a politically sensitive issue the recommendation by the Committee headed by the former Planning Commission member Kirit Parikh for an immediate increase of Rs 100 per LPG cylinder, Rs 6 per litre of kerosene and fixing of two auto fuels at current market prices has posed a tough choice to the ruling coalition at the centre.
The exercise of fixing the retail prices of four mass consumed petroleum products—petrol, diesel, domestic cooking gas (LPG) and kerosene—which is being currently undertaken by the government, is a major stumbling block in reforming the petroleum sector.
In the absence of market determined retail prices of four mass consumed petroleum products, the state-owned Oil Marketing Companies (OMCs) like Indian Oil Corporation (IOC), Bharat Petroleum (BP) and Hindustan Petroleum (HP)— have been incurring revenue losses by selling products below cost prices.
Control mania
Economic rationale suggest that with the rise in global crude oil prices, domestic retail prices of petroleum products should automatically go up. But this is not happening in India.
The government on its part is partly compensating the OMCs through a subsidy-driven oil pricing policy with a three-tier mechanism. OMCs partly recover their losses as the government allows them to effect marginal rise in auto fuels-petrol and diesel—while virtually keeping prices of kerosene supplied through Public Distribution System (PDS) and domestic cooking gas unchanged.
The major chunk of remaining amount of revenue losses is met through government-issued oil bonds. Public sector oil producing firms like ONGC, OIL and GAIL also bear part of the burden by selling crude oil and gas to the state-owned OMCs at a discount. But this sort of subsidy-driven oil pricing policy is not only pushing up government’s deficit but also making state-owned OMCs financially sick.
But the government has been in a real dilemma on how to evolve an oil pricing policy, which will not only be sustainable and viable but also protect the poor sections of society from the vagaries of volatile global oil prices. Seen from this perspective the Parikh Committee suggestions are balanced. It wants market driven pricing of two auto fuels and continuation of subsidy on kerosene and LPG for economically underprivileged group along with periodic rise in prices. In case of determining the pricing of kerosene—considered as poor man’s fuel—and domestic LPG, the Parikh Committee has recommended continuation of subsidy by applying principle of social equity.
It also suggested that prices of kerosene supplied through PDS and domestic LPG be linked to increase in per capita income for urban and rural population, respectively. Interestingly, in a bid to bring down losses of OMCs in selling kerosene below cost price the Committee has recommended periodic reduction in PDS kerosene allocation based on level of electrification in villages.
To minimise the subsidy burden drastically the Committee has suggested ultimate switch over to a smart card system of direct subsidy on LPG and kerosene through use of unique identification numbers (UID). One of the significant recommendations made by the Committee relates to imposition of additional tax of Rs 80,000 on diesel cars to discourage use of subsidised diesel by rich people.
Excise duty
As the Committee points out “the high excise duty on petrol compared to diesel encourages use of diesel cars. While greater efficiency of a diesel vehicle should not be penalised, a way needs to be found to collect same level of tax that petrol car users pay from those who use a diesel vehicle for passenger transport.”
This has naturally unnerved auto industry as imposition of higher tax on diesel vehicles will retard its growth. As per an estimate diesel cars account for 35 per cent of 1.5 million cars sold in the country. On the other hand environmentalists, who have been campaigning for ban on use of diesel for personal transport, feel the proposal to tax diesel cars “comes too late in the day and is insufficient.”
On the sensitive issue of oil subsidy the Committee while recommending that the government may give maximum oil subsidy of Rs 20,000 crore in a year has proposed that up-stream oil firms like ONGC, OIL and GAIL be asked to share a portion of their incremental revenues from nominated blocks. But the Committee has not made any serious effort to understand the plight of oil firms, which are reeling under subsidy burden. This will make a serious dent to country’s vision for energy security.
Continuation of subsidy burden will discourage state-owned oil firms to invest aggressively for exploration of new oil and gas reserves, which hold key to build up energy security.
Though the committee has not gone whole hog in recommending determination of retail prices of four mass consumed petroleum products as per market forces, the political compulsions will make it difficult to implement most of its recommendations.
Already there is resistance within the ruling Congress party as well as its coalition partner like Trinamool Congress to impose any more burden on common man by effecting hike in petroleum products. As it was seen in the past, finally the government may be guided by political expediency rather than economic rationale in accepting most of the recommendations of the Parikh Committee. In the past the government had set up two committees, one headed by former RBI Governor C Rangarajan and another by the former Planning Commission member B K Chaturvedi, to create a roadmap to deregulate oil and find a viable oil pricing mechanism. The government selectively adopted a few of those recommendations, which were not politically difficult to implement. It is to be seen whether Parikh Committee’s recommendations will also gather dust like the earlier ones.
