It is a sad irony that when international oil prices are on a downward spiral, India has administered its biggest increase ever in the domestic price of petrol. Behind this irony lies a story of gross mismanagement of the oil economy by successive governments. The winds of reform that blew across other infrastructure industries such as telecom, transforming them unrecognisably, have largely been absent in the oil industry. The result is a mess characterised by ballooning subsidies, opaque pricing policies and a government that is guided more by political expediency than economic considerations in managing the industry. The reason why Wednesday's price increase of Rs.6.28 per litre — net of taxes, translating into hikes as high as Rs.8.36 in some States — turned out to be so big is that the government, which faced State elections, did not allow oil companies to increase prices in the last six months when global oil markets were on the upswing. By the time the oil companies got the nod, their deficits had spiralled so high that shock therapy became inevitable. We might yet see a partial rollback but the question to ask is: would it not have been less painful if prices had been increased gradually over the past few months rather than in a one-shot massive hike? A regular increase in small doses might also not have elicited the kind of opposition the big raise has now engendered.
That said, we need greater transparency in the pricing methodology adopted by the oil companies who link their domestic fuel prices to those in commodity markets abroad such as in Singapore and Dubai. The concept of “under-recovery,” which is basically the difference between the landed cost of petrol and its domestic selling price, needs to be questioned. India imports crude oil and not petrol or diesel. So why should domestic prices of the two fuels be linked to their international prices? Ideally, the price build-up should be based on the landed cost of crude oil plus the cost of refining and marketing the product. The increase in petrol prices also means the gulf with diesel has widened, further distorting the dynamics of the passenger car industry. By raising petrol prices, the government has only partially addressed the problems of the oil industry. The bigger challenge is dealing with a diesel price increase that has implications for inflation. There is also the issue of paring subsidies on cooking gas and kerosene that are weighing down government finances. Apart from trying to answer the basic question of whether the subsidy on cooking gas, which is by no means a poor man's fuel, is necessary, the government needs to streamline the subsidy delivery mechanism to ensure that only the deserving enjoy it.