From a narrow fiscal perspective, Friday’s hike of Rs.5 a litre of diesel was probably unavoidable given the pressure on the finances of oil companies and the inability of the government to bail them out. Yet one cannot help but point out that the shock of such a large price increase, both on the economy and the common man, would have been lower if only the government had practised the policy of regular adjustment of oil product prices. A sudden release of pent-up price pressure can have a cascading effect on economy-wide prices that is greater than the cumulative impact of small increases. Inflation in August at 7.55 per cent is already higher than July’s 6.87 per cent and the effect across the economy of higher diesel prices will only push it up further. Consumers will be hit not just by higher prices of everything from transport to food commodities — freight operators have already increased rates — but also by the elimination of a part of the subsidy on cooking gas. The price increases and the rebound in latest inflation figures have probably put paid to any hopes of a reduction in interest rates in the upcoming mid-quarter monetary policy review next week.

The government will also, sooner than later, have to take a call on a dual pricing policy for diesel or on imposing higher duties on diesel cars and utility vehicles. Latest automobile sales data show that sport utility vehicles (SUVs), which are powered by diesel engines, are outselling passenger cars and within the latter category, diesel cars are fast overrunning petrol engine models. This is clearly a function of the wide gulf between petrol and diesel prices — after the increase, diesel will still be cheaper than petrol by an average of 31 per cent across the country. The difference in prices is baffling considering that refining costs are approximately the same for the two products. In fact, what we need is transparency in pricing of petroleum products, something that is currently absent. The government goes by the “under-recoveries” of the oil companies, which is the difference between landed import costs of petroleum products and their retail selling price. The former is always higher than the latter leading to “under-recoveries.” The oil companies need to be asked why diesel and petrol prices should be benchmarked to Dubai and Singapore market prices respectively when they are not imported from these places. Petroleum product prices should be a function of the cost of importing and refining crude oil in the country. The present pricing system is flawed and consumers pay for the inefficiencies of the oil companies

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