It is not surprising that the expert panel headed by Kirit Parikh on the pricing of petroleum products should recommend total decontrol of the retail prices of petrol and diesel while suggesting a more gradual approach in the case of kerosene and LPG. In July-August 2008, the B.K. Chaturvedi committee had recommended a similar deregulation, although in its case, the process of aligning domestic prices with global ones was to be spread over several months. If the Kirit Parikh panel has its way, petrol and diesel prices would go up by between Rs.3 and Rs.4 a litre immediately, wiping out “the under recoveries” of public sector oil companies and substantially reducing the level of government subsidies. For the cooking fuels — kerosene and LPG — it calls for a nuanced approach but even here an immediate price rice of about Rs.100 for an LPG cylinder and Rs.6 for a litre of kerosene sold through the public distribution system (PDS) is suggested. The expert group charged with the task of devising “a viable and sustainable system of pricing of petroleum products” has had to come up with a methodology of minimising, if not avoiding altogether, the burden of subsidies. The three major public sector companies are expected to end this year with a total of Rs.45,500 crore as “under recoveries,” with kerosene accounting for about Rs.17,420 crore and LPG Rs.14,152 crore.

Making out a case for the continuance of subsidy on kerosene in rural areas, the panel has recommended that the price should be revised every year in relation to the per capita agricultural GDP. Among its suggestions to narrow the gap due to “under recoveries” is the sharing of production revenue from nomination blocks of the upstream government-owned oil companies, the ONGC and Oil India. Cash subsidy in certain cases should be charged to the budget. Even with these and other measures, subsidies would still be required but they will remain stable at a manageable Rs.20,000 crore. In a sensitive area such as petroleum product pricing, the government will need to consider the political realities as much as hard-headed economics. It is indeed a difficult choice between coming up with a sudden, unpopular jump in petrol, diesel, kerosene and LPG prices on the one hand and, on the other, continuing to bear ever increasing subsidies that would stretch the fiscal balance to the breaking point. Also, at a time when the government is under criticism for letting food and essential prices rise, an increase in fuel prices could raise transportation costs and push up the prices of essentials further. It is, however, clear that the present system of pricing petroleum products is not sustainable and a change, even if gradual, is imperative.

Correction

A sentence in the first paragraph of “A difficult choice” (Editorial, February 8, 2010) was “For the cooking fuels — kerosene and LPG — it calls for a nuanced approach but even here an immediate price rice of about Rs.100 for an LPG cylinder and Rs.6 for a litre of kerosene sold through the public distribution system (PDS) is suggested.” It’s “price rise”.

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