The Hindu Business Line : Ad hoc approach to full-blown fuel crisis

AFTER much procrastination, the Government made a crucial decision to hike the retail price of petrol and diesel while leaving the price of kerosene and LPG intact in a bid to stem the financial haemorrhage of the oil marketing companies.

This response of the Government to a full-blown fuel crisis once again demonstrates the typical ad hoc approach characteristic of the interventionist mindset, even as the petroleum sector remains deregulated on paper!

That the coalition Government remains wary enough not to rub the Left parties supporting it from outside is a foregone fact. Yet the roller-coaster ride of global crude prices in recent months with the cost of oil on New York Mercantile Exchange surging 50 per cent in a couple of months this year to reach a record $70.85 a barrel on August 30 meant the response to the crisis for the import-dependent countries like India ought to have been swift and substantial.

The Government did it expeditiously is evidenced by the fact that excluding the latest hike on September 6, the domestic prices of petrol and diesel were revised on six occasions during April 2004 to August 2005. But the prices of kerosene had remained unchanged since March 2002, while that of domestic LPG since November 2004.

The rationale for leaving the prices of kerosene and domestic LPG untouched by the upsurge in crude prices abroad is a conscious policy decision whereby the oil marketing companies (OMCs) have been modulating the impact of exorbitant oil prices on domestic retail prices of sensitive products, viz, PDS kerosene, domestic LPG, petrol and diesel.

The heavy and increasing losses borne by the OMCs primarily stem from the persistent and widening mismatch between domestic retail prices of petrol, diesel, PDS kerosene and domestic LPG on the one hand, and global oil prices which have been zooming this year so far, on the other.

Even after customs and excise duty adjustments over the last financial year and partial revision in domestic retail selling prices of petroleum products, OMCs are likely to sustain unconscionable under-recoveries close to the order of Rs 40,169 crore by the end of this fiscal. Hence it was found expedient to resort to one more revision of petrol and diesel price to minimise the aggregate losses to the OMCs in line with the Government policy of `equitable burden-sharing' among the principal shareholders, viz the Government, the oil companies and the consumers.

While justifying the latest hike in petrol and diesel prices, the Government claimed that "there would be no impact on the vulnerable sections of society or housewives for that matter and the burden would be least on the common man".

As the Government put it, a part of the burden would be borne by it through issue of oil bonds with the balance by the OMCs. The issue of oil bonds is being considered after carefully weighing the option of the excise duty cut will have on the revenue from the petroleum sector, which appears to be not commensurate with the projected growth during the Budget.

Energy experts and economists alike say that rationalisation of duty structure in the petroleum sector is the need of the hour as the percentage of tax to total price for petrol is 57 and 35 in India, against 37 for petrol and 20 for diesel in Sri Lanka and 24 for petrol and 15 for diesel in Thailand.

In India, the retail selling prices of petrol and diesel are far higher than the cost of production as they embed, besides the basic price, applicable excise duty, state taxes, VAT, dealers' commissions and notional freight from the nearest refinery.

Interestingly, the estimated contribution of the oil and gas companies to the Central exchequer rose from Rs 64,595 crore in 2002-03 to Rs 77,692 crore in 2004-05, while that of State Exchequer this went up from Rs 32,156 crore in 2002-03 to Rs 43,254 crore in 2004-05.

It is small wonder that the Finance Ministry and the State Governments are the most reluctant ones to renounce this tax bounty with the petroleum sector being reckoned as the milch cow.

So, with the Government finding tax receipts from petroleum sector sustaining its other spending in a major way, the incentive to cut taxes to accord relief to consumers does not figure in its scheme of things.

The alternative is to propagate conservation, which unfortunately has been relegated to backburner as the country had become inured to wasteful and conspicuous energy consumption.

With an estimated 76 per cent of the country's crude requirements being met by imports, the pricing mechanism can no longer afford to insulate any single product user or segment from the gyrations of the global markets.

Hence, the best course is to progressively wean the domestic LPG users too away from subsidy while targeting the subsidy on kerosene in a focused fashion to the deserved classes without further delay.

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