Opinion - Editorials   

Beyond short-term fixes

The hike in the retail prices of petrol and diesel by as much as Rs.4 and Rs.2 a litre was expected although its timing — on the eve of the Union budget — was not. A month ago, Petroleum Minister Murli Deora had expressed the government’s resolve to come to terms with the vexatious issues of oil pricing. Ever since the administered price mechanism was abolished in 2002, all governments have been adopting ad hoc policies that failed to achieve the intended objective of apportioning the burden equitably among consumers, producers, marketing companies, and the exchequer. The pricing methodology that has evolved is opaque: oil marketing companies have been complaining of “under recoveries,” a term loosely interpreted as selling below cost. Upstream oil companies such as the ONGC and GAIL are subsidising the public sector marketing companies, who in addition depend upon government subsidies to meet a substantial portion of their under-recoveries. The total under-recoveries on transportation fuels as well as LPG and kerosene, earlier estimated at Rs.70,000 crore for this fiscal, are expected to drop to Rs.56,000 crore, after the latest price hike. In a manner of window dressing, all governments have pushed the subsidy burden outside the budget by issuing oil bonds. Such off-budget items have added considerably to the fiscal deficit, a factor that is bound to impact the budget.

A long-term solution lies in dismantling a majority of controls and allowing the petroleum companies to determine prices subject to certain well-defined norms, a course of action favoured by the Economic Survey. The government missed an opportunity to put in place a well-conceived mechanism as suggested by the B.K. Chaturvedi Committee in August 2008. Petroleum prices that peaked at $147 a barrel in July 2008 collapsed sensationally to below $40 in December. Obviously, any solution that involves removing government controls has a better chance of succeeding when prices are low. The government did pass on the benefit of low global prices by cutting the retail prices significantly in two stages — by as much as Rs.10 in the case of petrol. However it failed to evolve a framework and frame guidelines that would apply in a situation of rising global oil prices. In the global markets, petroleum is now ruling above $70 a barrel, up from the $60 levels when the UPA government assumed office. Ominously, all forecasts are for oil prices to climb higher. While ad hoc fixes may serve in the near-term, it is time a longer-term solution was found.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Focus on passenger amenities
Beyond short-term fixes
Anatomy of homeland and identity politics
Turning Tamil swords into Oriya ploughshares
Mystery of Scotland’s shrinking sheep solved
Corrections and clarifications
Condemnable
Memorials & statues
Homosexuality
Air India should put its house in order: Praful Patel exclusive

Copyright © 2009, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu