March 26, 2012

india should de-control diesel and lpg prices

Recently, I contributed an editorial for the newspaper I presently work for. It was on the pressing need of the Indian government to de-control the prices of diesel and domestic LPG. 

Here is what I wrote in the editorial I submitted to the newspaper:

Iron is hot. Strike now.

Wasting time in indecision on de-control of regulated fuel prices is a luxury the country can absolutely not afford to indulge in at the current time. It is not very often that you get a situation where on all fronts, economic, geo-political and national political, the mix of pressure points and lack of it, is just right for the government to de-control all fuel prices.

On the economic front, there are some grave figures of losses to the national ex-chequer that are just screaming for not just attention but also action. The public sector oil marketing companies (OMCs) have suffered from under-recoveries in regulated fuels to the tune of Rs 97,313 crore in the first three quarters of the current financial year.

Diesel under-recoveries were the highest at Rs 56,732 crore, followed by about Rs 20,000 crore each for domestic liquefied petroleum gas (LPG) and kerosene sold through the government's public distribution system. Under-recoveries, caused as they are by the difference between the higher landing cost of the imported fuel paid by OMCs and the lower government-controlled price that the OMCs realise from the dealers. In terms of per unit prices, the under-recoveries, as of mid-March prices, amounted to Rs 13.10 per litre for diesel, Rs 28.67 per litre for kerosene and Rs 439.50 per cyclinder for LPG.

The higher the international prices of crude oil and natural gas go the higher will be the under-recoveries which is very near the point where it will be like the last straw that broke the laden camel's back. The poor fiscal health of the economy makes it much worse for continuing with subsidised fuel prices.

The government tinkered with custom duties by reducing it earlier in the current financial year and this has caused a direct loss of Rs 49,000 crore for the whole year. The finance minister was the least ambigous about the harmful effect that a combination of lower tax receipts and higher expenditure (around 60 per cent of under-recoveries are paid for in cash by the government and the remaining borne by the upstream oil companies such as ONGC and GAIL) was having on the fiscal deficit.

Even the price of de-controlled petrol has been indirectly kept under check by the government for more than a year now. At current prices, the OMCs are losing Rs 4.12 per litre on petrol which is the difference between price of about Rs 42.54 per litre paid by OMCs to refineries on landed cost basis and the price of Rs 38.42 per litre they are charging to petrol dealers. Excise duties and value added tax are factored in the final retail sale price which is Rs 65.64 in Delhi.
With key state elections of Uttar Pradesh, Punjab, Uttaranchal Pradesh and Goa over last month there remains not much of political brownie points to be scored in keeping fuel prices at low levels. Congress, the largest party in the ruling coalition, has lost heavily in these state elections despite all attempts to dangle lower fuel prices as a carrot to the electorate.

There are two full years remaining before the next general elections and the ruling establishment should worry much less about political future than it does about the future of the country's economy. Internationally, the geo-political situation is on fire with crude oil imports from Iran, the hotspot, not going to be without additional costs attached to it.

In the current financial year, India has met 12 per cent of its crude oil demand from Iran. We import more from Saudi Arabia. The changes that US and European Union sanctions on dealings with Iran will entail on Indian crude oil import is difficult to ascertain precisely but keeping domestic fuel pries is certainly going to make the oil import management far more difficult.

The iron is hot and the government should strike immediately. A petrol price hike alone will not help.

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