Oil prices must be decided by market forces

NEW DELHI: Confederation of Indian Industry (CII) president R Seshasayee has called for a gradual movement towards a market-determined oil price mechanism.

Market forces should determine price of petroleum products in the domestic market as long as international oil prices are within a specific price band, and any movement of international prices beyond the band must lead to an automatic response on the price front, which is known in advance, said Mr Seshasayee.

The Rangarajan Committee report deals with this aspect of pricing in detail and it is important for the government to ensure that India moves in that direction, according to a statement by the chamber.

Mr Seshasayee reiterated that India must look at ways to reduce its dependency on oil imports. About 70% of India’s oil consumption is met by imports. “With the government taking recourse in the debt market for financing oil deficits, it merely passes the liability on to our future generation, which is economically and ethically not correct. We cannot afford to grow today at tomorrow’s expense,” he said.

While the current buoyancy in the economy makes financing through receivables possible, it is quite possible that the economy may not be this robust always, and then the lack of liquidity in the system may prove to be a major bottleneck, he pointed out.

Mr Seshasayee said the current reduction in prices might help in containing headline inflation within the 5.5-5.7% level by year-end. As a short-term measure, the price reduction would be welcome by the user community. “However, this should not detract us from the objective of letting market forces have a greater role in the pricing of oil,” he added.

“Our focus should also remain on subsidies in LPG and kerosene, which need rationalisation urgently. This needs to be part of the larger fiscal exercise in oil, where what needs to be done is to follow the Rangarajan Committee Report and adopt the formula for changing over to trade parity prices and rationalise state taxes. The government should make all oil products ‘VATable’ and switch over to GST by 2010,” he said.