Back For a rational fuel pricing policy
G. SRINIVASAN
| Subsidies issue brooks no delay |
Outlining the various factors in the Government's decision to raise the prices of petrol and diesel, and the implications of the price hike, G. SRINIVASAN stresses that the issue of curbing subsidies has to be faced head-on if economic growth is to stay on track.
The overall effect of the transportation fuel price hike is bound to be inflationary.
With no sign of the global crude oil prices relenting, the Centre's decision to raise the prices of petrol (by Rs 4 a litre, up 9.2 per cent) and diesel (by Rs 2 a litre, up 6.6 per cent), after considerable procrastination and interminable confabulations with ministries and coalition allies, has come not a day too soon.
The Government has also rightly resolved to reduce the Customs duty on petrol and diesel to 7.5 per cent from 10 per cent and move to a trade parity regime, from import parity regime, as suggested in February by the Dr C. Rangarajan Committee..
But the excessive dependence (more than 70 per cent) on imported crude oil, with domestic production all but stagnant, means that the government has to adjust periodically the domestic selling price of petroleum and its products. But this is a difficult task, particularly for this Government whose survival depends on support from coalition partners that are set against fuel price hikes.
Pressures, protests
As pressure builds on the Government, even from within the Congress party, talk of scaling down the hike is now doing the rounds, proving that reforms can, at best, be random and that hard options may be suicidal to political careers.
Even as the Administrative Pricing Mechanism was dismantled on paper in 2002, the previous NDA government dithered in adjusting petro prices the last two years of its tenure, while the UPA regime, having just completed two years of its term, has revised fuel prices quite a few times, including this week.
Though the Government has spared the middle-class and the poor by leaving cooking gas and kerosene prices untouched, the overall effect of the transportation fuel price hike is bound to be inflationary, as it would push up the cost of commodities because of higher freight costs. A study by the Indian Market Research Bureau in 1998 found that the transport sector consumes 59 per cent of diesel and that even a modest hike in its price is bound to make a difference to the prices of commodities!
The subsidised petroleum products — public distribution system (PDS) kerosene and domestic LPG — are being marketed only by public sector oil marketing companies (OMCs), for which they sustain under-recoveries (the difference between price chargeable as per approved formula and price actually recovered from the consumer net of taxes, duties, etc).
The combined net worth of public sector OMCs is about Rs 41,500 crore (as on end-March 2005) against which the burden of Rs 73,500 crore by way of under-recoveries is "simply far too heavy", the official press note to announce the price hike said. It may also be revealing to note that the estimated per unit subsidy on an LPG cylinder was Rs 22.58 from the Government Budget and Rs 152.46 by oil companies in 2005-06.
The downstream companies would shoulder about Rs 9,000 crore after implementation of the trade parity concept, lowered Customs duty for petrol and diesel, and through commercial discounts. Alongside, the upstream (oil producing) companies would bear Rs 24,000 crore, giving up most of their incremental revenues. The Government, on its part, would provide financial support through bonds of Rs 28,300 crore, which would cover a large part of the burden. Even as the Government is coming out with a slew of measures to cushion the burden of the hike and ensuring some elbow-room for sparing LPG and PDS kerosene, it should look more closely at the Rangarajan Committee suggestion of restricting subsidised kerosene to below poverty line (BPL) families only, raising the price of domestic LPG by Rs 75 a cylinder, and discontinuing with the practice of asking upstream companies to provide assistance but instead collect their contribution by raising the Oil Industry Development Board (OIDB) cess from the current Rs 1,800 a tonne to Rs 4,800.
Use the cess smarter
The OIDB was established in 1975 under the Oil Industry Development Act to provide financial support to the industry to ensure its holistic growth. The annual cess collection amounted to nearly Rs 5,400 crore. Since the inception of the OIDB and up to end-March 2005, the Central Government had garnered a gargantuan Rs 55,966.81 crore by way of cess. Of this, the OIDB has received a measly Rs 902.40 crore till March 2005.
Various official committees, including the House panel and the Comptroller and Auditor General of India (CAG) have, in their reports, drawn attention to the need for using the cess exclusively collected from the oil industry for the development of the oil sector. In fact, the latest Standing Committee on Petroleum and Natural Gas, in its 10th report on Pricing of Petroleum Products tabled in Parliament in the Budget session in May, reiterated its plea for instituting a Price Stabilisation Fund (PSF) using the cess on crude oil to stabilise somewhat the wild swings in petro-product prices.
It had also felt that a part of the cess proceeds could be used to provide subsidy on PDS kerosene and LPG gas. However, as the PSF has revenue implications on fiscal budget and the cess proceeds being poured into the Consolidated Fund of India to cover the needs of the other sectors of the economy, the Finance Ministry has not taken this suggestion seriously. Undeterred, the Ministry of Petroleum and Natural Gas has been pressing the point to manage the affairs of the oil industry more pragmatically. In this, the Petroleum Ministry has found an ally in the Planning Commission, which has backed the proposal "in principle" but said that this would burden the Budget and affect Plan resources.
Reining in subsidies
Hence, while placing emphasis on adjusting the kerosene and LPG prices to keep the subsidy at reasonable levels, the Plan panel suggested that increasing the cess on petroleum products could generate additional resources for financing subsidy. This is also a suggestion of the Rangarajan Committee.
With global crude prices on a permanent roller-coaster and domestic dependence on imported crude oil not showing any let-up in the absence of any significant oil finds or alternative energy in the form of bio-fuels gaining considerable ground, the Government has no choice but to hike the prices of select products.
It is not for nothing that the IMF's World Economic Outlook, released in April, stated that the speed of adjustment of demand would depend much on government policies and on the viability of alternative technologies. But the progress on alternative technologies for efficient energy consumption has been poor in India, a country of continental size.
But the question of reining in subsidies, particularly on LPG, and targeting kerosene specifically to the deserving and needy can no longer be ducked; continuing with them blindly can only be at the risk of deflation and losing the post-reform growth advantage.
A rational pricing policy coupled with conservation and promotion of efficiency in energy use alone will ensure progress for the country; not shortsighted populism and political gambits that seek to gain mileage from global oil uncertainties.
© Copyright 2000 - 2009 The Hindu Business Line