Biting the bullet

The report of the Kirit Parikh committee on the pricing of petroleum products should receive serious consideration from the UPA government because the government’s finances are under serious stress and the political cost of implementing some major recommendations may not be too high now. The committee has proposed total deregulation of petrol and diesel prices and an easing of the control on kerosene and LPG prices. Recommendations for reform of the petroleum product price regime are not new. Two major committees have made proposals in the past but the political sensitivity of any tinkering with the present system of subsidised pricing had prevented any meaningful action. The NDA government had made a beginning but the effort fizzled out later. The Parikh committee has made a rational analysis of the price situation and its implications.

The recommendations, if accepted and implemented, will lead to a saving of about Rs 30,000 crore at the current level of under-recoveries for oil marketing PSUs. Sharp increases of the order suggested by the committee may be difficult to implement at one go. It has proposed an increase of Rs 4.72 for petrol, Rs 2.33 for diesel, Rs 6 per litre for kerosene and Rs 100 for an LPG cylinder. It has been pointed out that such sharp price hikes will worsen inflation but the committee has showed that the impact will not be as bad as being made out. Sooner or later the government will have to loosen the control on petroleum prices and the time is right now to make a beginning. There are no major elections in the near future and at the current price of about $77 for crude, the effect of a retail price hike may not be very big.

The government can make a road map for a gradual decontrol of prices and stick to a well-laid-out schedule so that the consumers will not be shocked by a steep and sudden hike in prices. The prices of petroleum products have increased only slowly in the last five years and so there is enough cushion for a well-considered price increase now. It can be effected as part of a system of well-calibrated and better targeted subsidies, efforts to reduce consumption and for conservation of oil  and development of alternative sources of energy. Increased competition in the petroleum retailing sector will also help the consumers and even the government.