Oil prices in India remain administered seven years after they were ostensibly freed. The arguments for subsidy and damping international crude price fluctuations bear little iteration. Most governments indulge in some form of oil price control for these reasons.
The way we go about it, however, leaves a lot to be desired. India changes its fuel prices with an eye more on the election calendar than on the Brent graph, losing much of the damping desired and stretching in the process both the buyer and seller of oil. The call for a price band outside which global oil shocks should automatically transmit to the Indian market takes out some of the political vagaries of deciding when, and by how much, fuel prices should be raised. It is time this petroleum ministry proposal stopped gathering dust.
Moving on to subsidy. Does the entire economy need an energy dole? An oil subsidy bill of Rs 130,000 crore, or 2.5 per cent of the GDP in 2008-09, is unsustainable. Of this only a token Rs 3,000 crore figured as an explicit subsidy for kitchen fuels in the government’s books. Shouldn’t a subsidy that is nearly half again as much as the ‘official’ fiscal deficit be targeted better at the people who need it? Differential pricing exists for kerosene, there is no reason why mechanisms cannot be devised for other fuels. Issuing ever-increasing amounts of oil bonds merely passes on the tab to our future generations.
The silver lining after this week’s steep hikes in the prices of petrol and diesel is that the government appears to be seized of the issues. It’s now a question of grasping the nettle. It would have been easier to deregulate India’s oil economy when crude was trading in the $30 range earlier this year. With the government having run through 27 per cent of its targeted fiscal deficit for 2009-10 in two months, it is high time we untangled some of the knots in our energy pricing policy.