Prices and decontrolling diesel prices altogether. The sharp fall in global crude oil prices had paved the way for a major reform in fuel pricing but the model code of conduct, which came into force after the announcement of the assembly election schedule in Maharashtra and Haryana, is acting as a spoiler. Assembly elections in the two states are scheduled on 15 October and the government would be seen influencing the voters by reducing diesel prices.
The fall in global prices has helped state oil firms make a profit on diesel, which has been a source of heavy subsidy burden for about a decade. State oil marketing companies are currently gaining about 40 paise per litre on diesel compared to its assumed market price. Companies have gained from fall in global prices and the gradual increase in retail price of diesel.
Finance minister Arun Jaitley and RBI governor Raghuram Rajan have already expressed their keenness on fuel price reforms. Before the unexpected fall in global oil prices, Jaitley had told Parliament that the government would be able to decontrol diesel fully in a year if there are no international shocks in the oil sector.
Diesel price deregulation will be a major policy reform of the Narendra Modi government.
Diesel decontrol would have made economic sense as it would have removed uncertainty about pricing and improved the finances of the oil companies and the government. It would have encouraged responsible consumption of the fuel and cut down on undeserved subsidy, in case of a jump in crude prices in the future.
The petroleum & natural gas ministry had prepared a draft for the Cabinet Committee on Political Affairs (CCPA) to decide that henceforth diesel prices would remain on a par with international prices. The reason the government has to take a decision through the CCPA to dismantle the diesel subsidy regime is that it will mean the reversing of an earlier Cabinet decision. Once the decontrol is done, the private sector oil companies can resume retail sales of diesel, from which they had withdrawn citing the burden of subsidies.
While the government has been allowing a monthly correction in diesel prices to go through, there was consequently still no decision on dismantling of the administered price regime for diesel. The UPA government too had brought in the Cabinet note but had deferred it as the
general elections were approaching.
Had the proposal gone through, the government could have moved to rationalise the price of LPG. The oil ministry makes a loss of ?427.82 per subsidised cylinder even after the international prices have softened to such degree, according to data from 5 the ministry’s Petroleum Planning z and Analysis cell.
I Highly volatile
£ The decision to decontrol prices could have been taken before the EC announced the poll schedule when the declining trend became obvious but a section of the BJP leadership feared a sudden spike in international oil prices in the near future that would adversely affect the party’s poll prospects. The proposal (for diesel price decontrol) is thus currently with petroleum minister Dharmen- dra Pradhan. Oil ministry officials are believed to have advised him that with international crude prices being highly volatile, they cannot be depended on to give the Centre the room to see through an unannounced end to the subsidy regime unless it is explicitly mandated.
Crude oil prices tumbled below $98 last fortnight, falling to the lowest in two years, but India’s fuel pricing system links petrol and diesel rates to their respective international benchmarks, which don’t always move in step with crude. Exchange rate also influences local prices.
Incidentally, petrol prices may not be hiked this time. The government has directed oil companies not to raise diesel prices by 50 paise by end of this month if over-recovery continues in rest of the month. As for the diesel price cut, which expected by the end of September, it may now not happen for a month till the assembly elections are over.
Petrol prices were decontrolled in June 2010 but the government has moved with caution on diesel. Unlike petrol, diesel has a variety of uses including in commercial transport and agriculture. Any tweak on diesel affects the costs of ferrying goods throughout the country and has a trickle-down effect on inflation.
♦ RAKESH JOSHI