In a move that some describe as bold and others as callous, the central government has substantially raised the prices of petrol, diesel, kerosene, and LPG. It has also moved to a decontrolled price regime in the case of petrol and promised to implement the same for diesel in the near future. The immediate and near-term impact of these decisions would be an aggravation of the inflation focussed on essential commodities that currently burden the common person. Petroleum products are consumed in some measure by all. Being universal intermediates, increases in their prices have a cascading effect on the costs and prices of all commodities, including essentials. Given the current inflationary surge, therefore, this is the worst time for hikes in, and the decontrol of, the prices of petroleum products.
The government's claim that this was unavoidable because of the “losses” being suffered by the oil marketing companies (OMCs) is difficult to swallow. When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute. This leads to what are termed “under-recoveries.” However, in most years these under-recoveries do not turn oil refining and marketing firms into loss-making enterprises. This is because they deliver a range of products and services, the prices of all of which are not controlled. Under-recoveries are notional losses that only lower book profits relative to some benchmark. Thus, there is little danger that the industry would be bankrupted even if prices were kept at their earlier levels. Moreover, because until recently the industry was wholly in the public sector, the prices of oil products were treated as one set of instruments in the tax-cum-subsidy regime of the government. Any losses suffered by the industry or additional funds it required for investment could be met from resources mobilised through taxes that fall on the rich. There is, of course, the question of fairness. Since there are many players involved in the industry, there is no reason why under-recoveries should affect only the books of the oil marketing companies. This requires the oil refineries to offer discounts when selling products to the OMCs and for the government to reduce the taxes it levies on oil products in order to absorb part of the under-recovery. The government should have focussed on these matters for which rules can and have been devised. Opting instead for a steep hike in petroleum product prices in the midst of an inflationary episode is clearly mistimed, insensitive, and politically self-damaging. It also seems intended to favour the private companies that have been allowed to enter and expand in this sector. Private companies will treat any shortfall in profits as a “loss” and demand price adjustments. But they cannot be placated by unduly burdening the rest of society, especially the hundreds of millions of poor people.