Oil prices in India remained administered for eight years after they were ostensibly freed. Only now the government has mustered the courage to free petrol from bureaucratic pricing. The arguments for subsidy and damping international crude price fluctuations bear little iteration. But the way we go about it, however, has left 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. With the price of petrol pumped out at the refinery as well as at the gas station following international crude oil prices, the consumer will be subjected to the harsher discipline of market forces that curbs wasteful expenditure. It remains to be seen how efficient the mechanism we devise to transmit global oil movements to the Indian market is; the hard part will be for the government to resist the temptation to decide when and by how much fuel prices should move.
Petrol is, of course, the easy bit. It accounts for only one in ten rupees Indian oil companies and the government lose on account of selling fuel below its market price. Diesel, kerosene and cooking gas make up for the other nine. In the 12 months to March 2010, the government picked up a tab of Rs 71,300 crore of the Rs 103,300 crore under-recoveries of the oil companies. Friday’s hikes in the prices of diesel and the cooking fuels will shave Rs 24,000 crore off the Rs 77,000 crore estimated losses this year, but they fall short of the government-appointed Kirit Parikh Committee recommendations for deeper reform. Freeing up diesel prices alone would have wiped out another Rs 25,700 crore. Steeper hikes in the prices of cooking fuels would have limited the government’s oil subsidy to
Rs 23,000 crore for any price of crude oil between $70 and $140 a barrel. Presumably, some sort of subsidy sharing will be in place till the next logical step of free diesel prices is reached. Its contours will keep shaping the fiscal deficit.
Free fuel prices are a precondition to reducing the tax burden petroleum carries in India. Although the government does not put out numbers, conservative estimates suggest half the excise duty collection in the country is from petroleum products. Even with the subsidy in place, petrol cost thrice as much at an Indian gas station as it did in the US. As domestic petrol prices rise another 10 per cent, this gap opens up. Part of the reason for India’s relative lack of competitiveness among Asian manufacturing exporters is its expensive energy: the latest round of hikes could add up to a percentage point to wholesale inflation. Dismantling its high-cost energy economy has been a crusade India has shied away for too long. Rejoice in the baby steps we have taken last week.