For the first time in more than nine months, the average price of crude oil imported by Indian refiners has fallen below the $ 100-a-barrel mark. That, along with the crash in world gold prices, may offer some respite, as both together accounted for almost half of the increase in the country’s overall import bill during the last five years. While gold may have, at least for the very near term, entered a bear market – there is clearly some dissipation of ‘investment’ demand, as against demand for ‘genuine’ jewellery-buying purposes – the same cannot be said about oil. Last year, between March 13 and June 22, the Indian crude basket fell from as high as $ 125.44 to as low as $ 89.19 a barrel. That, however, proved transitory, as prices were back to $ 100-plus levels in barely a month’s time.
One shouldn’t, therefore, draw conclusions yet from the 13-14 per cent fall seen in the past couple of months. The best one can hope for, at this point in time, is that prices will hold at these levels. Certainly, signals from the oil futures market on contracts for durations of six months to one year are a pointer to some optimism on this front, giving some leeway from a balance of payments perspective. It also makes the job of petroleum subsidy phase-out that much easier for the Government – both financially and politically. Already since March 1, the under-recovery on diesel sales by public sector oil companies has fallen from Rs 11.26 to Rs 6.42 a litre. It means that even if retail prices are raised by 45-50 paise every month – as is being done now – the subsidy on diesel can be eliminated in a year’s time. And as consumers see petrol prices not rising – or even falling, as they indeed have been since last month – deregulation becomes politically more palatable. The last aspect assumes all the more importance in an election year.
Stable, if not lower, global crude prices will not only help bring down the Government’s fuel subsidy bill, but also set the stage for private oil companies to sell diesel. Given the state-owned oil marketing firms’ reputation for quality and quantity, the latter can handle a rupee or two price differential in petrol as well. Currently, it is the Government’s policy of compensating the losses of only state-owned retailers that is preventing private oil companies from selling. But once there are no under-recoveries in diesel and only a marginal differential in petrol prices, it opens up the auto fuels market to real competition. That entails an Indian Oil Corporation having to fight with a Reliance or Essar to supply to the Railways, truckers, mobile tower companies and even farmers. But all this can happen only if the Government commits itself to not bringing back price controls. The temptation to do so may be lower for the next Government, expected to take over in mid-2014 – assuming the polls are on schedule.