• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

IN EXACTLY two weeks, the oil industry would be freed of all controls. The deregulation of this critical industry has major implications for the consumers, oil companies and the Government. A number of prickly issues are expected to arise post-April 1 and the biggest worry now is that the Government appears not fully prepared to handle them. A regulator for the petroleum sector would be absolutely necessary, but the Government is yet to constitute such an authority. The industry is clueless on the Government's plans to maintain order in the deregulated scenario till a regulator is in place. Issues that an unregulated free market can throw up are tremendously complex and call for immediate attention from the Government in the next fortnight. Let us just sample one such prickly issue — retail pricing of petro-products.

Who will monitor fair pricing?

This has hitherto been the job of the government. However, from April 1, oil marketing companies will fix the prices of the products they retail. The petrol pump price would now be linked to prevailing global oil prices; the Oil Pool Account buffer will be no more. The marketing companies — Indian Oil Corporation, Bharat Petroleum, Hindustan Petroleum and IBP — will be free to fix retail prices in tune with their own cost structure. Theoretically, a company that is efficient in its crude sourcing and refining can afford to price products at a lower level than another comparatively inefficient refiner.

For example, a company such as Indian Oil, which owns close to 40 per cent of the country's refining capacity and has advantages of scale economies can price its products cheaper than the others. The difference at the retail level need not be very large — it can be Re 1 per litre or less — but it can certainly cause an imbalance in the market. Assuming that one of the marketing companies adopts this strategy, what will be the impact? Who will ensure that marketing companies do not resort to such tactics? The Oil Co-ordination Committee is to be disbanded, and the Government cannot administer such micro level issues anyway. This is where the presence of regulator would become crucial. He would be responsible to ensure fair market practices, including pricing.

There is already a debate on whether the regulator should sit in judgment on pricing policies. Unlike say, in telecom or insurance, petro-products pricing would be a dynamic activity. Pricing policies could change even on a daily basis based on global oil price swings. So it may not be possible for the regulator to notify daily prices for the market, the argument goes. True, maybe. Yet, it bears reiteration that a regulatory over-view over the pricing policies is absolutely essential. Especially because we would be dealing with products that are economically sensitive and also touch the common man directly. The administrative problem of supervising volatile price movements can be tackled easily by fixing ceiling and floor prices for all products. Such a ceiling and floor can be made dynamic by linking them with global prices that would ensure they move with international prices.

Assume that the regulator has to ensure that the pricing of petrol is fair. He can specify that the floor and ceiling of retail petrol prices should not be more than, say, `x' per cent over the prevailing global prices. This `x' per cent ought to be fixed in consultation with the oil companies as it should cover their costs, duties and margins. Once such a limit is set, it would be simpler for the regulator to monitor the pricing policies of the companies at the retail level. There is considerable scope for the oil companies to use the pricing policy as a weapon to gain share in the deregulated market. Given the nature of the industry and its sensitivity, it is imperative that the Government comes up with a mechanism quickly to monitor and control this aspect.

It may take some time for the regulatory body to be set up as it has to be put through Parliament as an enactment. In the interim, the Government has to come up with an arrangement that would ensure minimal chaos in the free market-place, post-April 1.

Send this article to Friends by E-Mail

Stories in this Section
Sugar: Sweet and sour of it

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line