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Setback to oil sector reform

There are two ways of looking at the price cut enforced by the Centre on petrol and diesel. First, as a consumer-friendly measure that will ease the burden on the common man and probably, even lift up sentiment ahead of the festival season when the middle-class opens its purse to buy everything from clothes and jewellery to durables and non-durables.

With elections around the corner in five States, the Centre’s hope is that a cut in duties will change the narrative in its favour.

Signal to RBI

The cut is also probably a signal to the RBI ahead of its monetary policy announcement on Oct 5 on the Centre’s commitment to keep inflation in check.

The consumer interest logic will also probably justify the fact that the Centre is leaning on the three oil companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — to absorb ₹1 of the ₹2.50 per litre cut.

Indeed, Finance Minister Arun Jaitley, in his media interaction, refused to agree that this move was going back on deregulation and justified it saying that it was needed to give relief to consumers without impacting the fiscal deficit.

Financial depth

The oil companies have the financial depth to take on the burden for now. And, they have anyway been built over the years with taxpayer funds when they were fully owned by the Centre. So why not use them now to help the tax-payer?

This logic would be compelling if only not for the reason that it flies against the reformist credentials of this government and secondly, it ignores the small fact that there are now public shareholders who own large parts of the equity of these companies.

The government cannot act against their interests by passing on a part of its burden to their companies. And that’s the reason why the stocks of these three companies fell off the cliff in the last few minutes of trading after the Centre’s announcement on Thursday. The real test will come if global oil prices continue to rise in the coming days. The ₹2.50 a litre cut now will be overrun in no time and the Centre will be back to square one. What will it do then, in an election year?

Obviously lean on the oil companies more. Net-net one thing is clear: reforms are now second priority for this government.

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Printable version | Oct 7, 2022 4:31:15 am |