Decontrol oil prices

The Budget has prepared the ground for decontrol of fuel prices. On the face of it, what the finance minister did was to pass the buck to the petroleum minister, who, said the FM, would decide on the Kirit Parikh committee’s recommendations to free up diesel and petrol prices and reduce the subsidy on LPG and kerosene. However, that was just the speech. In the outlays and levies that form the core of the Budget, Mr Mukherjee has left the oil minister little option other than to decontrol prices. The allocation for oil subsidies is a mere Rs 3,108 crore, one-fifth the level in the current fiscal year. This would suffice to cover just a part of the kerosene subsidy. But this is not all. The FM said that there would no longer be any financing of oil subsidy through below-the-line issue of oil bonds.

This means that what the Budget shows as the petroleum subsidy is all it has to offer on this count. The Budget also brings back the import duty of 5% on crude oil that had been waived as an extraordinary measure when global prices went up beyond $110 a barrel. The FM also restored the import duty of 7.5% on petrol and diesel and 10% on other refined products, and also hiked the excise duty on petrol and diesel by Re 1 per litre each. What these restored duties do is to raise the cost of petrol and kerosene at the refinery gate, and thus widen the gap between refinery gate prices and the retail prices, called under-recovery of the oil marketing companies, in the jargon. There is no subsidy forthcoming from the Budget to meet this gap. ONGC could offer some minimal cushion, but not more than a fraction of the approximately Rs 46,000 crore of under-recovery estimated this year. So, either the oil marketing companies will sink or the petroleum ministry must decontrol prices.

Decontrol of petroleum prices would, at the macro level , boost energy conservation, efficiency and the search for alternative fuels. The move would also show the world that India is serious about its commitments on climate change. After a one-time impact on prices, decontrol would help contain overall inflation, reining in the fiscal deficit and generating efficiency gains from competition among oil retailers, including new, independent ones.