Economists moot per litre subsidy for diesel

Be it power, coal, or petroleum products, pricing is the most crucial component. Senior economists of the Government seem to share the view and have called for reforms in the energy pricing policy.

The Economic Survey 2011-12 says that in a market where all dominant players are public sector companies, “market price” is not a very meaningful concept. “It is easy for Government to control State-owned companies through nods and winks,” it adds.

For diesel, where the very first step for freeing prices has not yet been taken, the Survey says a possible intermediate step is to fix a per litre subsidy from the Government.

“… for every litre of diesel sold by an oil marketing company, the Government will give fixed subsidy of certain number of rupees,” it says, adding that this is not ideal but as an interim measure has several advantages.

While arguing in favour of this mechanism, the Survey points out what is important is that the subsidy should be pre-specified so that, thereafter, Government stays fully out of the picture.

“Whether or not we give a per litre subsidy, till such time when more private firms enter this business, we may have to use a formula-based upper bound on the consumer price … this will move up and down with the international price of crude and exchange rates and the upper bound will be set so as to ensure that firms can cover their costs,” it says.

On petrol price, which was deregulated in June 2010, the Survey says the first step is to have a transparent formula.

The formula is: if the price of crude is x and the exchange rate y, then every month or fortnight, Government announces a maximum price of petrol, which can be worked out by anyone.

“The rule has to be worked out to make sure that oil marketing companies can, in general, cover their costs,” it says, adding that once the rule is announced there should be no interference by the Government.

On coal pricing, the Survey – while stating that pricing is a crucial issue says that Coal India Ltd being the dominant player in the country has to adopt a pricing policy that is transparent, credible and based on global norms. There is a need to introduce competition, it says.

For power sector the Survey states that viability of the players would require either the adjustment of user charges in line with the cost of providing access to these services or an adjustment in the subsidy levels.

Apart from the financing issue, the power sector would be constrained by fuel shortage and environmental issues. Mismatch in coal supply and shortage of gas for the power sector have impacted the output. Delay in forest and environmental clearance, in particular for hydro-based power projects, has delayed capacity addition. There are financial health and viability issues across the entire spectrum of the power sector — generation, transmission and distribution, the Survey says.

> richam@thehindu.co.in

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