When it comes to fuel prices, India has been following a policy of mixing administrative controls with free market forces. The net result has been that all the players involved — the government itself, the overwhelmingly State-owned oil refining and marketing companies and above all, the consumers, have ended up losers. The hike in prices of petrol and diesel has achieved little, while creating more problems. The oil companies will still be faced with a yawning gap between what they get by way of net earnings from sales and the costs they incur in the manufacture and distribution of petro-products, especially in heavily subsidised products like domestic LPG and kerosene for ‘below poverty line’ (BPL) consumers. This cap, euphemistically called ‘under-recoveries’, is in excess of Rs 73,000 crore for the sector as a whole (including crude oil and natural gas producers like ONGC). The current package of increased petrol and diesel prices, reduced customs duties and a revised crude oil pricing structure will only cover a small part of the under-recoveries. The balance has to be borne by the oil companies, which will face further erosion of their net worth, and the government itself.
Its subsidy burden is set to nearly triple. The issuance of Rs 28,000 crore worth of oil bonds by way of compensation to the oil companies is merely postponing the inevitable. It cannot keep issuing IOUs for ever. Sooner or later, the bonds will have to be repaid. Yet, the subsidy regime is expected to persist in its current form. There’s little evidence to suggest that there is the requisite political will across the spectrum to tackle it. The Left continues to routinely oppose any attempt to reduce LPG and kerosene subsidies, despite ample evidence that the barest fraction actually reaches genuine BPL families. Other parties are less vocal, but equally reluctant to grab the bull by its horns.
One cannot fault any government on the question of subsidies for the poor. Indeed, any government which does not strive for a greater measure of social equity is fundamentally flawed. But it is equally flawed to mask electoral populism under the garb of equity. Mixed policies will always deliver mixed results.