The Hindu Business Line : Late and little

AFTER ALL THE indecision of the last few weeks, it is indeed a relief that the Government finally got moving on the vexed issue of raising retail fuel prices. But that is about the best that can be said on the latest round of prices increases. What we now have is a half-hearted attempt that satisfies neither the oil companies nor the consumers; indeed, the only stakeholder to smile will be the government itself, which has ensured that it does not sacrifice any revenue. Its share of the burden will be issued as bonds to the oil companies. It is disappointing that after mulling over the issue for so long, the Government has failed to evolve a comprehensive, long-term solution to the problem. Given the runaway rise in global oil prices, the retail price adjustment necessary was of a much higher order and across all four products — petrol, diesel, cooking gas and kerosene. The increase of Rs 3 per litre of petrol and Rs 2 for diesel allowed now is probably just enough to ensure that the oil marketing companies remain in business. It may help in mitigating some of the losses piling up on their books but is by no means enough to wipe off the red ink, especially if global oil prices maintain their upward trend.

Given the magnitude of the problem as also the fact that the world appears destined for high average oil prices — upward of $45 a barrel — one would have expected the Government to adopt a long-term approach to the issue. That would have involved a review of the Customs and Excise levies on petro-products and a re-look at the subsidies on kerosene and cooking gas and ways of funding them without recourse to the oil companies. Implied in this approach is granting oil companies the freedom to price transportation fuels based on market forces. However, what we have is yet another piecemeal approach that only partly addresses the issue of under-recoveries; even here the government has played safe by refraining from increasing the prices of the two politically-sensitive products — kerosene and cooking gas — though subsidies on the two are galloping away. It beats understanding why there should be a subsidy at all on cooking gas which is a fuel used by the middle-class and, worse, why should most of this subsidy come out of the pockets of the oil companies rather than the government? Granted, oil companies are cash cows but they should not be milked for funding the government to whom they already pay hefty dividends. Rather, their cash would be better used investing in and growing their businesses.

The Government has also been smart in deciding to cough up its share of the burden in the form of bonds to the oil companies. The bonds may plug the revenue gap for the oil companies but they will do nothing to bolster cash flows, which have been hit by the non-revision of prices in the last three months. Second, the bonds may take care of the accumulated under-recoveries but what happens if global oil prices continue to rise? It appears the Government is banking on a retreat in global oil prices soon though the general prognosis is the opposite.

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