India: High Fuel Subsidies Cannot be Sustained

The Parikh committee is also concerned about the large-scale misuse of fuel subsidies on petrol, diesel, kerosene and cooking gas, amounting to more than Rs 1,03,000 crore in 2008-09. It is the third expert group set up by the UPA government in the last five years to suggest a sustainable fuel pricing model.

Overall, the committee members favour freeing retail prices of all four products from government control and using smart cards to transfer subsidy directly to the poor. The more pragmatic among them wants to ensure that the committee recommendation is palatable to the politicians. They want to negotiate freedom for petrol and diesel pricing by allowing the government to retain its control over pricing of kerosene and diesel, the fuels perceived to have tremendous influence on the electoral behaviour. But those favouring radical changes are insisting on tough measures, forgetting that the committee has no role in implementing its own recommendations, and that in the past too, measures that run contrary to political interests were ignored.

If a pragmatic approach is adopted, pump price of petrol can be decontrolled immediately. Oil marketing companies could be allowed pricing freedom for diesel as long as crude oil price remains below $90 a barrel. The government should step in only when crude price breaches this level — to check inflationary impact of rising diesel price. Subsidies on kerosene and cooking gas could be rationalised in the second phase.

This is not a new approach. The previous UPA government had taken a similar view in 2008. Last December, the Union Cabinet had taken an in-principle decision to deregulate prices of petrol and diesel after crude oil price slumped to about $40 a barrel from a peak of $147 a barrel in July 2008. But politics prevailed over the economy. With general elections looming, the decision was not implemented. When the UPA returned to power, the role of fuel pricing strategy in keeping middle class happy was seen as an important contributor. So, deregulation was abandoned, at least for the near term. The creation of an expert group to advice on a viable and sustainable system of pricing petroleum products, as announced in Budget 2009, only reflects that the government is not in a mood to free pump prices of petrol and diesel. Deregulating kerosene and cooking gas prices is even more remote.

The policy of keeping fuel prices artificially low is damaging all oil companies in rthe sector both public and independent.  It is expected some decisions will be made in January.

PetrolWorld 071209