The Hindu Business Line : Paying through your nose for petrol

Artificially, a measure of `stability' has been injected into the petroleum products pricing system, the sole objective being to keep the electorate well-fuelled.

IN TERMS of prices, the Indian oil scene has been quiescent for some time - since January 31 to be precise, when the last revision of prices was made at the industry regulatory level.

This may be a cause for satisfaction to some people, not least those in the outgoing NDA Government which can point to the development and argue that the "stability" in oil prices is indicative of the good economic management by the Vajpayee Government. But, of course, as everyone knows, the "stability" has been artificially generated by the political masters of the day, the sole objective being to keep the electorate in good humour in the run-up to the elections that are about to be completed.

The entire exercise of keeping prices "stable" has been a political sleight of hand because, again as everyone knows, on strictly economic grounds there can be no justifiable reason for keeping the prices unchanged. This is because though the administered pricing mechanism was dismantled sometime ago, the Government has retained control of domestic oil prices through the public sector oil companies.

On paper, the oil companies have been given the authority to set their own prices in tandem with international price movements, the review of domestic prices taking place twice every month — on the 1st and the 16th.

But implementation of the review decisions is not quite an internal oil company affair because the boards are involved at this level, and on the boards are representatives of the owners, namely the Government of India.

Very briefly, when prices were revised at the end of January, Nymex crude was priced at around $30.84, Brent being quoted at around $31.20 a barrel. At the time of writing, the average cost of crude on the world market is $39.50 a barrel, but the domestic price of petrol, diesel, kerosene and cooking gas remains unchanged. Surely, one cannot but describe this "stability" in domestic prices as artificial.

According to one rule-of-thumb calculation, every dollar increase in the international price of crude should lead to a 60 paise increase in the price of a litre of petrol and 40 paise in the case of diesel.

Given the increase in the world price of crude over the past three months, the domestic price of these petroleum products should have gone up gradually. But this has not happened because of political manipulation on the even of the elections.

While, artificially, a measure of "stability" has been injected into the petroleum products pricing system, what in effect has been done is to administer a dose of severe instability. The tragedy is that consumers cannot escape the impact of the stiff blow that is bound to be delivered when, perforce, the domestic prices of petroleum products is brought into some sort of an alignment with prevailing international rates.

Given the current level of world crude prices and the domestic rates, it has been calculated that the average consumer of petrol and diesel in India may have to shell out as much as Rs 5 and Rs 3 a litre more for the two products, respectively.

While the steep increase in the domestic price of these products cannot be avoided, it remains to be seen whether the price revision (which will in all probability be effected in early June) will cover the gap at one shot or whether the oil companies will be prevailed on to close the gap in two or three stages, that is, over a period of 45 days.

The strong chances are that whatever Government comes to power at the Centre, the price increase will be staggered to make the blow somewhat manageable for the hapless consumer. While such staggering will of course be appreciated, there should be no respite from drawing attention to the fact that all that is happening now on the petro-product pricing front should actually have happened in March and April.

What is galling is that some Ministers and senior officials are persisting with the effort to cover up the partisan political manipulation of petroleum product prices, being oblivious of the fact that by going so they are only holding themselves up to ridicule.

Thus, the other day, the Secretary in the Ministry of Petroleum and Natural Gas was quoted as saying that there would be no "major increase" in the price of petrol and diesel and that the oil companies "are reviewing it and they will take appropriate action". Of course they will; in fact, they have been clamouring for an increase for some weeks now.

To suggest, even indirectly, that the oil companies have, on their own, decided to keep oil prices unchanged since the end of January is not only to inject an unacceptable political and social dimension into their decision-making system but also to insult the intelligence of the general Indian public by expecting that such an explanation stands a chance of being accepted.

On the issue of there being "no major" increase in the price of petroleum products in the pipeline, the official should congratulate himself for being in the company of his Minister.

In the middle of last week, Mr Ram Naik is reported to have told a gathering somewhere in the South that "there was room for oil firms to absorb the impact", obviously hinting at the huge increases which oil firms have made in their profits since April 1, 2002, when the pricing system was "liberated".

If Mr Naik is right in his argument, it is clear that, even in the post-APM regime, the public sector oil companies are playing, or are expected to play, a major social role in society at the expense of hard, conventional economic decisions. But there is a small problem here which could upset the Minister's applecart.

If the social role of the oil companies is accepted, would it not be natural to expect that the companies would, in the first place, have shunned running up huge profits by keeping prices at "socially acceptable" levels, even if this meant subsidising their product prices? But, of course, this has not happened, and it is clear why - because there were no countrywide elections during the past two years (barring the Assembly polls in a handful of States) and, consequently, the Government had no reason to "gently" remind the oil companies of their non-existent "social" obligations.

This is not to suggest in anyway that the price of petroleum products should not be subsidised. This is a separate issue altogether and involves other parameters governing the general direction of Government policy in crucial economic spheres. But if one is to hold that the pricing system in the Indian oil industry has been liberalised — in that the APM has been given a burial — there is no room for arguments as specious as those used by the Petroleum Minister and his Secretary.

To repeat, the plain truth of the matter is that the domestic prices of petroleum products have been kept unchanged in the run-up to the Lok Sabha elections so as not to upset the electorate, in the process making mincemeat of the oil-pricing deregulation measure which, incidentally, was implemented by none other than Mr Naik himself.

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