The government's claim that this was unavoidable because of the losses being suffe

red by the oil marketing companies (OMCs) is difficult to swallow. When the dome
stic prices of oil products are controlled but the price of imported oil is risi
ng, oil marketing companies receive from the consumer less than what it costs th
em to acquire the products they distribute. This leads to what are termed under-r
ecoveries. However, in most years these under-recoveries do not turn oil refining
and marketing firms into loss-making enterprises. This is because they deliver
a range of products and services, the prices of all of which are not controlled.
Under-recoveries are notional losses that only lower book profits relative to s
ome benchmark. Thus, there is little danger that the industry would be bankrupte
d even if prices were kept at their earlier levels. Moreover, because until rece
ntly the industry was wholly in the public sector, the prices of oil products we
re treated as one set of instruments in the tax-cum-subsidy regime of the govern
ment. Any losses suffered by the industry or additional funds it required for in
vestment could be met from resources mobilised through taxes that fall on the ri
ch. There is, of course, the question of fairness. Since there are many players
involved in the industry, there is no reason why under-recoveries should affect
only the books of the oil marketing companies. This requires the oil refineries
to offer discounts when selling products to the OMCs and for the government to r
educe the taxes it levies on oil products in order to absorb part of the under-r
ecovery. The government should have focussed on these matters for which rules ca
n and have been devised. Opting instead for a steep hike in petroleum product pr
ices in the midst of an inflationary episode is clearly mistimed, insensitive, a
nd politically self-damaging. It also seems intended to favour the private compa
nies that have been allowed to enter and expand in this sector. Private companie
s will treat any shortfall in profits as a loss and demand price adjustments. But
they cannot be placated by unduly burdening the rest of society, especially the
hundreds of millions of poor people.

HT

Oil prices in India remained administered for eight years after they were ostens
ibly freed. Only now the government has mustered the courage to free petrol from
bureaucratic pricing. The arguments for subsidy and damping international crude
price fluctuations bear little iteration. But the way we go about it, however,
has left a lot to be desired. India changes its fuel prices with an eye more on
the election calendar than on the Brent graph, losing much of the damping desire
d and stretching in the process both the buyer and seller of oil. With the price
of petrol pumped out at the refinery as well as at the gas station following in
ternational crude oil prices, the consumer will be subjected to the harsher disc
ipline of market forces that curbs wasteful expenditure. It remains to be seen h
ow efficient the mechanism we devise to transmit global oil movements to the Ind
ian market is; the hard part will be for the government to resist the temptation
to decide when and by how much fuel prices should move.
Petrol is, of course, the easy bit. It accounts for only one in ten rupees India
n oil companies and the government lose on account of selling fuel below its mar
ket price. Diesel, kerosene and cooking gas make up for the other nine. In the 1
2 months to March 2010, the government picked up a tab of Rs 71,300 crore of the
Rs 103,300 crore under-recoveries of the oil companies. Friday s hikes in the pri
ces of diesel and the cooking fuels will shave Rs 24,000 crore off the Rs 77,000
crore estimated losses this year, but they fall short of the government-appoint
ed Kirit Parikh Committee recommendations for deeper reform. Freeing up diesel p
rices alone would have wiped out another Rs 25,700 crore. Steeper hikes in the p
rices of cooking fuels would have limited the government s oil subsidy to
Rs 23,000 crore for any price of crude oil between $70 and $140 a barrel. Presum
ably, some sort of subsidy sharing will be in place till the next logical step o
f free diesel prices is reached. Its contours will keep shaping the fiscal defic
it.
Free fuel prices are a precondition to reducing the tax burden petroleum carries
in India. Although the government does not put out numbers, conservative estima
tes suggest half the excise duty collection in the country is from petroleum pro
ducts. Even with the subsidy in place, petrol cost thrice as much at an Indian g
as station as it did in the US. As domestic petrol prices rise another 10 per ce
nt, this gap opens up. Part of the reason for India s relative lack of competitive
ness among Asian manufacturing exporters is its expensive energy: the latest rou
nd of hikes could add up to a percentage point to wholesale inflation. Dismantli
ng its high-cost energy economy has been a crusade India has shied away for too
long. Rejoice in the baby steps we have taken last week.