Fuel Prices: To Raise or not to Raise

The Kirikh Patel Panel report recommending complete deregulation of the oil prices has stirred up a hornet’s nest splitting most of us right down the middle, we are either for it or against it. A brief look into the recommendations would show us the pro’s and con’s of oil price deregulation.

Currently the price of oil and its downstream products including Petrol,Diesel,Kerosene and LPG are regulated by the government, which means that they are not sold at a market determined price rather the government determines the prices by providing subsidies. If an oil refinery makes a loss by selling at this price then the loss is subsidised by the government through oil bonds. An important distinction is made here in that only the PSU Oil refineries are subsidised in this manner and not private players like RIL and Essar Oil thus effectively removing them from the domestic retailing. Leaving this ethical issue aside, the oil subsidies are a huge drag on the exchequer, forming a big part of the deficit our country faces at the moment.

The under-recoveries, as the subsidy is called amount to Rs 71300 crore in the previous financial year and because of the globally low oil prices in the current financial year the bill is predicted to turn out to a comparatively lesser Rs 31000 crore. However as the economy revives and consumption goes back to pre-2008 levels, it is inevitable that the prices shoot up thus increasing the subsidy bill. Worse still is the subsidy provided for LPG which is mostly used by well to do families and those who would not need the subsidy at any rate. The kerosene provided for the Below Poverty Line (BPL) families are a special consideration that has to handled after proper thought and analysis.

Moving onto the gains and pitfalls of the move, freeing up all the subsidy money would cut down our deficit thus reducing government borrowing which in turn would check inflation. The money can be better utilised in infrastructure and social sectors. The de-regulated prices would also ensure the efficient use of an increasingly scarce resource like oil. On the other hand increasing fuel prices can cause inflation due to an increase in transport costs of the commodities, however sustained study of prices in the US and Europe where fuel prices are not regulated do not show much effect of fuel prices on the prices of commodity. Even the indian economy during the OPEC embargo years of the 1980’s did not inflate much on the sudden increase in prices.

We can also look at increasing the usage of Compressed Natural Gas in mass transport and the usage of piped gas instead of cylinders as most of the retail cost of LPG involves the transport of the bulky cylinders. To address the issue of Kerosene to Below Poverty Line families we can utilize green sources like solar cookers and heaters for domestic use and electric motors instead of diesel motors to be used in the fields.

What cannot be ignored in India is the political angle, are the politicians brave enough to do the right thing? It would help if the consumers accept the harsh reality that sooner or later the global oil prices will outstrip even $100 a barrel and we would be facing a huge hole in our fiscal budget and lead us to the increasing interest rate-inflation trap. Here’s hoping that some action be taken on the report and we are cushioned by the prevailing low prices of the oil commodity.

Praveen Desabandu

[Image courtesy: http://www.flickr.com/photos/leejordan/2358587281/]