We need out-of-the-box thinking to liberalise diesel pricing

When Air India announced a loss of Rs 6865 crore in 2011 it became the largest loss-making public sector company that year. That news splash made a rallying cry to look into the sordid management of Air India. The government came under fierce attack.

However, when oil marketing companies (OMCs) announced their mind boggling first quarter loss in 2012 of Rs 40,000 crore, there was deafening silence. Why was such an indifference?

In any reasonably functioning economy governed by basic fundamental economic principles, such unprecedented losses would have sent tsunami type of waves in the market. Losses were suffered by the public sector OMCs like Indian Oil, Bharat Petroleum and Hindustan Petroleum all having the status of Navaratna. Still there was not even a ripple. Why?

The losses by the OMC Navaratnas look even more appalling while compared with India’s 2012-13 budget to help the poor through programmes like Integrated Child Development Services (Rs 15,380 crore), Sarva Shiksha Abhiyan (Rs 25,555 crore) and National Rural Health Mission (Rs 20,822 crore).

These Navaratnas used to have a high credit rating. Soon they may not be able to borrow to finance their operations. The tipping point will come when they cannot import crude oil. Should we wait for such a disaster as has happened in the case of state
electricity boards as manifested by the recent grid failure?

Whenever the OMCs complained about the burden of ever increasing under recoveries, experts challenged them by pointing out that they are just notional losses. They never failed to quote the large profits made by them even though those profits were not often adequate to give a decent return on their equally large assets. Now the critics of the oil companies have to look for some other explanation to support the petro product subsidies.

In fact, they can actually argue that when the government compensates the OMCs ( 30 per cent or less of the under recoveries), their losses would be reduced. But when the government pays to reduce the losses who bears the final burden? It is the common man through the higher inflation caused by ever increasing fiscal deficits. All our political parties including the ruling party are spinning the myths to support diesel subsidies. They protest that the cascading impact of higher diesel prices will hurt the poor.

Vote-bank politics

If they are given the option of allocating limited resources either to subsidise diesel costing more than Rs 1,30,000 crore per year or to improve education or health as welfare measures, the choice will be obvious. Unfortunately vote-bank politics is far more powerful than logic.

Every one knows that there is just no free lunch. Someone has to pay for higher crude oil costs. In recent months highly placed technocrats like the deputy chairman of the planning commission Montek Singh Ahluwalia, PM’s economic advisor C Rangarajan, RBI’s governor Subba Rao have been exhorting that India cannot afford diesel subsidy. Even the knowledgeable members of parliament know that the politicians are committing fraud when they argue that by subsidising diesel interests of common man are served. They also agree privately that diesel subsidy cannot be justified.

Transport sector consumes 70 per cent of total diesel demand and share of agriculture, power, and industry is 12 per cent, 8 per cent and 10 per cent respectively. It is true that higher diesel prices cause higher costs to all these sectors. But an in-depth and objective analysis shows that SUV owning rich families, or rich farmers having agriculture pump sets, or owners of standby diesel generator sets can and should pay higher costs.

The transport sector makes the loudest noise by threatening to strike when diesel price increases. They not only pass on the incremental cost of diesel price increase, but also overcompensate because of their monopoly position. Fare hike to compensate for diesel price increase in bus, railway, industry, and transport sectors has little or no impact on the poor. In reality they are outside the formal economy.  But they are affected by the general inflation which results from the fiscal deficit. When the government pays for the under recoveries of the oil companies, fiscal deficit increases. Still the myths are perpetuated that diesel prices affect the common man.

If rational arguments and facts are unable to force the government to liberalise diesel pricing (most agree that it is the correct policy) we need some out-of-the-box thinking. Why hasn’t oil companies allocated resources to reach the opinion makers of India by trying to tell the truth about diesel subsidies through newspaper advertisements? Mere reporting losses on different subsidised products has not worked. As discussed earlier, people doubt the very concept of under recoveries.

Despite the shocking levels of losses why the chairmen of the oil marketing companies have not threatened to resign and prefer to preside over the process of bankrupting their companies? At least such a sacrifice which can be considered as modern corporate form of satyagraha may prick the conscience of our political system. In the overall interest of India’s development, this may be a small price to pay. It may finally start the process of eliminating diesel subsidy gradually.

In the private industry when the chairman of a company is unable to implement his key recommendations he or she forces the board by threatening to resign. In fact,  along with them others in the government who deal with petroleum sector like planning commission deputy chairman, petroleum minister, petroleum secretary, PM’s economic advisor etc should also threaten to resign. Then it may create a political tsunami to bring about the needed liberalisation of diesel pricing.

Before diesel subsidy becomes a sacred cow like PDS kerosene and domestic LPG, we need to take some out-of-the-box type of action. Without sacrifice it is not easy to achieve worthy goals.