On a slippery slope

Finance Minister Arun Jaitley’s announcement of measures late last week to lower the retail price of automobile fuel represents the ideological capitulation of the NDA government to the pressures brought upon it by the sharp spike in oil prices. For months, the government appeared to take a principled position against intervening in the market despite the soaring cost of fuel. But the limits of taking political heat over rising costs may have been breached: in addition to lowering the excise duty on petrol and diesel by ₹1.50 a litre, Jaitley directed public sector oil marketing companies (OMCs) to cut prices by ₹1 a litre. The timing of the announcement — barely a month ahead of Assembly elections, leading up to the general election next year — points to a reflex reaction of an unnerved government.

The stock market’s savage response to the directive to the OMCs — the Sensex fell by nearly 1,500 points in two days, wiping out nearly ₹1 lakh crore in investor wealth — was triggered in part by a fear of a return to the fuel price control regime, reversing the deregulation of fuel prices in recent years. Premonitions of such an interventionist mindset had been offered even ahead of the Karnataka Assembly elections earlier this year when the OMCs, evidently influenced by political persuasion, held back on price hikes.

But the government tragically appears to have played its oil economics card all wrong. It had an incredibly lucky run with low oil prices in the past three years: it mopped up an estimated ₹7 lakh crore in excise collections on fuel over these three years, without consumers feeling the pinch of high fuel prices. Indeed, if it had lowered excise duty by an additional ₹1 a litre (instead of passing interventionist orders to OMCs), it may have emerged relatively unscathed despite the rise in international fuel prices. But with last week’s move, it has shot itself in the foot, and demonstrated its infidelity to the price deregulation regime.

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