The International Monetary Fund (IMF) has advised India to deregulate fuel prices, which it said is the best way to deal with the volatility in crude oil prices in the international commodity markets.
“Although politically difficult, price deregulation and full pass through is the best solution to deal with volatility in crude oil prices,” said IMF in its response to an expert group under former Planning Commission member Kirit Parikh looking into the smoothening of petroleum products pricing in India.
The expert group had asked the World Bank and the Asian Development Bank for their view on the issue and also to provide details on strategies being adopted by other countries to mitigate the impact of high crude oil prices Confirming the move, a petroleum ministry official said, “IMF, in its response, has sent a note outlining the petroleum price smoothing options and the results of a IMF country survey on pass through of fuel prices during 2003-2007.”
“Automatic price adjustment mechanisms are not a panacea instrument. Their successful adoption typically coincides with the political will to implement full pass through of international petroleum price changes,” the IMF said.
In India, the government regulates pricing of the four sensitive petroleum products and subsidises state-owned oil marketing companies — Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd — for their revenue losses or under-recoveries incurred by them on domestic sales of petroleum products.
The expert group is also examining the current tax structure of these products, particularly of petrol and diesel, and is also looking into the financial health of the public sector oil marketing companies to suggest ways of compensating for their under-recoveries in case they are not permitted to charge market prices.