The average price of crude imported by Indian refiners has fallen to $99.94 a barrel, the first time it has gone below the $100 mark since June 26, 2013. This has implications beyond the psychological, the most obvious one relating to the Centre’s subsidy burden from under-pricing of petroleum products. Take diesel, for instance, where the state-owned oil marketing companies (OMC) were until January 2013 incurring a revenue loss of ₹9.60 on every litre sold at below import/trade parity price. But since then, thanks to the previous government ‘authorising’ the OMCs to raise retail prices by 40-50 paise a litre every month, the under-recovery on diesel has come down to just ₹1.78 a litre. With global crude prices now softening — on the back of reverses suffered by the extremist Islamic group ISIS in Iraq — and the new government persisting with incremental price increases, diesel under-recovery could well be eliminated in the next few months.

This isn’t a small thing, considering that the total under-recoveries of OMCs amounted to ₹1,61,029 crore in 2012-13, of which ₹92,061 crore was on account of diesel alone. Once the under-recoveries on diesel go, the Centre’s fuel subsidy burden will be limited to domestic LPG and kerosene. But this can happen only if the Centre fully decontrols diesel prices as a follow-up to elimination of under-recoveries. It has already done this in petrol, where the OMCs revise prices on a fortnightly basis. Consumers have, in fact, seen petrol prices fall by nearly ₹3.50 a litre since July. The same needs to be done for diesel, where elimination of under-recoveries is only the first step. We need to eventually move towards not just complete price decontrol, but also genuine competition, that can come only with the entry of independent fuel retailers. The Centre should enable this by de-canalising petrol and diesel imports; there is no reason why only OMCs or those with refining/exploration operations in India should be entitled to marketing rights for transportation fuels.

The Centre must also work out a plan for phasing out under-recoveries in cooking fuels. If diesel is decontrolled and if kerosene continues to be sold at ₹15 a litre through fair price shops, the chances of the latter getting diverted for adulteration of the former will only go up. The best way to prevent this is by raising the price of kerosene to market levels and transferring the subsidy (currently around ₹33 a litre) directly into Aadhaar-enabled bank accounts of the beneficiaries. Direct benefit transfers have, after all, worked well in disincentivising diversion in the case of LPG cylinders — a scheme that has unfortunately been discontinued. We need radical solutions to end a fuel subsidy regime that does not promote equity and is fiscally unsustainable. And there isn’t a better time to do this than now.

Related Topics