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The government frees pricing of petrol
On June 25, 2010, the Empowered Group of Ministers (EGoM) took a major policy decision on the country's retail fuel pricing. After long deliberation for more than a year, the EGoM has freed the price of petrol from the government's control. On an immediate basis, petrol price has increased by Rs3.7/litre. Diesel price has also been increased by Rs2/litre and is to be deregulated in a phased manner. In the cooking fuel segment, domestic LPG price has been increased by Rs35/cylinder, and kerosene price has been raised by Rs3/litre. In view of the importance of household fuels - PDS kerosene and domestic LPG - the Government has decided that the subsidies will continue. The PDS Kerosene and Domestic LPG Subsidy Scheme, 2002 and the Freight Subsidy (For Far-flung Areas) Scheme, 2002 have been extended till March 31, 2014.
Prime Minister Manmohan Singh has said that the move to free petrol and diesel rates was "much-needed" reforms and that there should be no "excessive populism". "And the adjustment that has been made in the prices of kerosene and LPG was also necessary, considering the very high amount of subsidy that is implicit in their pricing structure," he said.
Most commentators have hailed the decision to free petrol pricing and the promise of similar freedom for diesel as a brave step and a major and bold reform initiative undertaken by the UPA government in its second term .
However, the move is just a step the government has been compelled to take because the three state owned oil marketing companies-Indian oil , Bharat Petroleum and Hindustan Petroleum - were reeling under the burden of huge under-recoveries on petroleum products - without the increase, public sector oil firms were projected to lose Rs 743 billion in revenues in 2010-11 fiscal- and is hardly part of a much thought out reform process. Three factors - retaining the power to intervene in pricing , the absence of a timeline of the diesel price deregulation, the failure to specify frequency of change in petrol price and the timing of the decision -undermine the government's contention that its actions have been guided by the need for reforms.
First, contrary to what is being stated , the government has retained its control over pricing. Future price revisions will be decided by the oil marketing companies in "consultation" with the government. The government has reserved the right to suitably intervene in case of in case of a high rise and volatility in international oil prices. The government has only reluctantly let go of control and will not hesitate to take it back. Murli Deora , Minister for Petroleum and Natural Gas , has reiterated his governments intention to intervene if required. Thus, it would appear that the oil industry had moved from APM (administered pricing mechanism) to a DAPM (Deora-administered pricing mechanism). In April 2002, the BJP-led NDA government had deregulated auto fuel prices by dismantling the administered pricing mechanism (APM). The oil marketing companies were given freedom to revise retail prices within a band. However, the decision was later revoked.
Second, the periodicity of price revisions is yet to be determined. Will it be fortnightly, monthly, quarterly or some other time-span? The petroleum ministry and state-owned oil companies are working on the periodicity and other modalities of the fuel price review.
Third, the decontrol is partial as only petrol prices have been freed. No time indicated for the decontrol of diesel. This is much more difficult decision to take as diesel accounts for a third of all petroleum products consumed, compared to a tenth for petrol.
Fourth, if the government has taken the decision now it is only because general elections are far off. If, as the government claims, price increase was necessary why did it not take the decision earlier -say in February 2009 when the crude oil prices were ruling at $ 50 . It did not do so as elections were imminent and any price rise would have affected its vote.
What the new decision has done is to unite the opposition. The National Democratic Alliance (NDA), and the Left parties issued separate calls for a 12-hour "Bharath Bandh" on July5th to protest the "hefty" increase effected in the prices of petroleum products by the United Progressive Alliance government. The bandh went off peacefully, was a major success and served to highlight the faults of the UPA government.
Reform or not, the policy change is a significant step in the right direction. The downstream oil companies - IOC, HPCL and BPCL -are likely to be benefit as their under-recoveries on petroleum products will decrease. Market determined pricing of petrol and diesel is expected to bring down the retailers' under-recoveries on the two products, which are projected to be approximately Rs 220 billion during the remaining part of 2010-11.
However, the state-owned oil firms are expected to face fierce competition for market share from their private counterparts post price deregulation.
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