India is preparing to bite the bullet on domestic oil pricing reforms after a year that saw its fuel subsidy bill rocket to more than $20 billion. The government needs to get its act together quickly, because the window of opportunity might be small.
Benchmark crude prices, which spiked from a low of $30s/barrel in February to more than $73/b at the end of June, have since slipped back to around $60/b, but could start spiraling up again at the first signs of a global economic recovery.
India's April parliamentary elections returned the dominant Congress party to power with a stronger mandate, freeing it from the shackles of its former leftist allies, who drew their weapons at the mere mention of a fuel price hike. But in less than five years, the sight of the next election might bring populism back into fashion.
Finance Minister Pranab Mukherjee in his fiscal 2009-2010 budget July 6 announced plans for an "expert group" to advise the government on a "viable and sustainable system of pricing petroleum products." A tall order in a developing country that needs to balance economic growth with restrained government spending on food, fertilizer and fuel subsidies. The composition and caliber of the expert group, which is yet to be announced, will be key.
"Decontrol petrol and diesel prices," declared India's annual Economic Survey released on July 2, a report card on the domestic economy in the year gone by and an influential paper guiding the government's budget policy. At the same time, the survey called for the setting up of "a policy response system" and a "financial buffer" for use when diesel prices rise above $80/b.
Partial regulation of gasoil, which fuels public transportation and the movement of goods, might be necessary to protect economic growth and guard against inflation. But it is hard to justify subsidizing gasoline for consumers who can afford cars, no matter how cheap. Robust public transportation is by far the superior policy response to the needs of the burgeoning cities in Asia than more cars and subsidized gasoline.
LPG and kerosene subsidies look likely to be left undisturbed for now. While kerosene is used by the poorest for cooking and home lighting, the consumers of LPG do not necessarily need state help to pay the market price of a cylinder. LPG could be taken down the same route as gasoil, with government help kicking in when prices cross a pain threshold.
As fuel price liberalization eases the subsidy burden of state-owned refiners and marketers Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp., as well as their upstream peers Oil and Natural Gas Corp. and GAIL, it would free up cash for their business growth and expansion.
Market-linked prices will also usher in the "level playing field" that private refiners Reliance Industries and Essar Oil have been demanding for a few years now. If these private players boost their currently modest retail business, the state sector will feel compelled to match their refining efficiencies.
I agree . Subsidised Petrol is a crime against the poor .
Diesel of Euro 2 in special Mkt companies owned petrol pumps to buses / trains / lorries is OK .
Diesel cars will like Euro 3 / 4 . They will pay the full cost od Diesel . It is just segregating Petrol pumps for Diesel . Poorer grade , better grade .
There is no need to subsidise LPG at all for the middle class
Thanks for your comment! I've always wondered at the wisdom of making available $2000 cars and cheap gasoline to have people spending hours in traffic jams. Even Indonesia, which has one of the highest fuel subsidies in Asia, only regulates the price of the lowest 88 RON gasoline. The higher grades are market-linked. Diesel price differentiation by grade should be doable too, but do you think segregating pumps would be a deterrent enough to adulteration?
Fuel price decontrol in India will never ever happen as the same will be a politically disastor. At First, the decontrol was muted by BJP Govt, and a very effective formula was drawn up by the petroleum minister Ram Naik. However in the wake of elections the formula could survive only for a few weeks. Next came the Rangarajan committe, which after deliberating for months togather gave a report in favour of liberalising oil prices. This report was swiftly thrown in the dustbin. Now there would be another committe which will deliberate for years and give a report in favour of decontrol, again to be thrown in the dustbin in the wake of another paraliamentary / state election. This is a never ending cycle called democracy in India.
On the other hand, one needs to look at the impact of decontrol on the economy as a whole. High diesel prices will lead to high inflation and a steep rise in food prices which is undesirable. Hence, the Ram Naik formula of sharing the burden of high oil prices, by the consumers, sellers and the government is the most effective way beyond 80 $/bbl oil.
Price differentiation by grade is not a good idea atall. Commercial and Home LPG is an example of what happens when grade / marketwise price differentiation is adopted. While the commercial LPG sales have remained flat, the home LPG sales are zooming. I guess around 10% of Home LPG goes into commercial use.