The Hindu Business Line : Crude tinkering

THERE IS NOTHING new in the concoction the Government is brewing to set right the oil economy. Options such as tinkering with import and excise duties by lowering them or converting from ad valorem to specific duties and creating a price stabilisation fund have all either been discussed or employed in the past. The only new suggestion is that of creating a price band for petrol and diesel within which the oil companies will be free to adjust prices without recourse to the government. But, then, the workability of this suggestion would depend to a large extent on how the ceiling and floor of this band are fixed. The idea of rationalising import duties and taxes has come not a day too soon. Duties and taxes on petroleum products in the country are amongst the highest in the world and there is no gainsaying that they need to be rationalised, whether by dropping the rates or by converting them to specific duties. With domestic prices of petrol and diesel linked to their landed cost, which is inclusive of Customs duty, a drop in import duties on the two products will automatically cause a fall in their retail prices. Of course, the effective protection available to domestic refineries will also reduce correspondingly but then oil companies have to learn to operate more efficiently to protect their margins. Similarly, a reduction in the import duty on crude oil will also serve to push down retail prices of petroleum products.

What is worrisome about the current measures being contemplated, however, is the idea of a price stabilisation fund. This is nothing but a backdoor re-entry of the Oil Pool Account, which was disbanded after much effort two years ago. Any going back on this will be regressive and will create more problems than it will solve. Who will manage such a fund and how will it be funded are just two of the important questions that immediately arise. Such a fund will only serve to perpetuate the system of cross-subsidies when the need of the hour is to phase them out. Indeed, if kerosene and LPG have to be subsidised, then the Government should account for it through the Union Budget and not by getting consumers of petrol and diesel to pay for it, as happens now.

The current environment offers the Government a golden opportunity to make a clean exit from managing the petroleum product pricing system. The sector should be left to market forces once the system of duties and taxes is optimally calibrated. Oil companies ought to be given the freedom to move product prices up or down in tandem with global movements. There is no reason why petrol and diesel prices, which are linked to volatile crude oil prices, should remain fixed when even the prices of vegetables, which are a basic necessity, fluctuate on a daily basis. The policy of subsidies and artificial low prices is also not helping the cause of promoting an optimum energy usage pattern in the country. The government should stop micromanaging the oil sector and there is no better time than now to make a start on that.