Be bold on oil prices

The reported preliminary thinking of the Kirit Parikh committee on oil price reform is far too timid. The panel reportedly wants to liberalise retail prices of petrol, but have market-determined prices for diesel only so long as crude oil prices stay below $90 per barrel. But given the weakness of the US dollar and the fact that crude already quotes at $77 a barrel, this amounts to continuing with administered prices for diesel, the most used petro product.

In any case, the idea of ‘freeing’ petrol prices while ‘fixing’ diesel prices by fiat would merely distort both prices and demand. It would be perverse incentive to step up fuel adulteration as well. As for the subsidy on domestic fuels, kerosene (SKO) and cooking gas (LPG), now amounting to over Rs 20,000 crore annually, the panels favours a further study to find out how the poor benefit. But various studies have shown that LPG is consumed mainly by the non-poor and SKO is used as an adulterant or smuggled cross-border.

Keeping retail fuel prices unchanged even as crude prices rise has meant a huge increase in government liabilities and widened the fiscal deficit. Estimates suggest that ‘under-recoveries’ in oil crossed Rs 1,00,000 crore in 2008-09, and the petroleum ministry reportedly estimates the subsidy bill to add up to Rs 54,000 crore this fiscal.

The monies would be a drain on budgetary funds for years. Such massive consumption subsidies for the non-poor send wrong policy signals and grossly misallocate resources. Worse, the under-recoveries would mean non-scheduled borrowings by oil companies which, given the volumes in oil, would tend to harden interest rates in general. Further, non-reform of oil pricing would needlessly jack up relative prices for ‘green’ fuel alternatives.We need prompt decontrol of oil prices and an end to the effective ring-fencing of retail sales.