Petro products price hike: The price of prolonged inaction?

After the pragmatic decision the UPA Government took on June 24 to increase the price of diesel, kerosene and domestic cooking gas, both the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, and the Union Finance Minister, Mr Pranab Mukherjee, justified the hike as ‘minimal increase' to cut down the whopping under recoveries of the oil marketing companies (OMCs).

The apologia for prolonged inaction and business as usual approach by the Union Government when crude oil prices were piercing through the roof, lest any frequent adjustment and aligning of domestic prices to global prices should invite the ire of consumers or other political parties, pale into insignificance when compared to the abrupt and steep increase administered overnight last Friday.

The authorities' contention that these price revisions would reduce the under-recoveries of OMCs to the extent of roughly Rs 21,000 crore when each day they were losing Rs 456 crore and that put together the national oil companies would still be wallowing in losses of the order of Rs 1.22 lakh crore through subsidies do not cut much ice mainly because the Government lacked the political will and pluck to periodically align domestic product prices when global crude prices went on a tizzy.

Again in the case of diesel, the widely consumed auto fuel which also comes handy in driving pump sets for farm purposes, besides being freely adulterated with kerosene to drive trucks and omni vans and mini-buses across the country, the authorities remained deafeningly silent all these days to effect an Rs 3 a litre.

To compound the error of inertia further, it announced a cut in excise duty on high speed diesel from Rs 4.60 per litre to Rs 2 litre absorbing a staggering revenue loss of Rs 23,000 crore for the full year. Still, the painful part is that the subsidy burden on the government oil companies on account of diesel would be Rs 66,000 crore this year.

Energy experts and economists do not see logic in the Government's act of increasing diesel price and reducing duties on it as together these opposite actions would not result in any let-up in demand or conscious move for conservation among consumers or those who use diesel-driven fleet of vehicles including sports utility vehicles (SUVs) or other high-end cars.

Despite the luxury of a spate of reports on a viable and sustainable system of pricing of petroleum products in its armoury including the one by the Expert Group led by Dr Kirit S. Parikh, the Government gave in only in the case of petrol when it made the price market-determined effective June 26, 2010.

It is also a travesty that despite dismantling the administered pricing mechanism in the early years of the last decade when the NDA was in charge, both the NDA and the UPA government never gathered the gumption to mark petro product prices to market movements globally.

Both regimes merrily directed the oil marketing companies to resort to price hike by fashioning an odd burden sharing formula by roping in upstream companies to share the burden.

This had definitely starved them of capital investment to undertake seismic surveys, drilling and exploration and production, entrenching import-dependency on energy forever.

In the case of domestic cooking gas the revision by Rs 50 a cylinder looks insufficient as the government continues to provide a subsidy of Rs 354 per domestic LPG cylinder, as against the price of LPG of Rs 878 in Sri Lanka, Rs 822 in Nepal, Rs 611 in Pakistan and Rs 484 in Bangladesh per cylinder.

Considering the heavy burden on the Government, both at the Centre and in States, continues to bear to ease the weight on consumers, it is time the authorities devised a dual pricing strategy for diesel and cooking gas so that those whose income is indexed to inflation come forward to bear the cost plus pricing of these products.

This would insulate the veritably vulnerable sections from the pangs of price pressure.

Otherwise, the government's self-abnegation to subsidise energy products across the country would help upper middle class and rich piggybacking on state-funded subsidy.

This distorted structure would not only lead to disorderly fiscal problems, aggravating inflation and abridging growth but also widening the disparities among people, warn policy analysts.

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