Oil price hike was done with mirrors, so expect more

On the face of it, it seems like the UPA government took courage in both hands and raised the prices of diesel, kerosene and cooking gas in one fell swoop on Friday.

But did it, really?

The price hike of Rs 3 a litre in diesel is a mere token of acknowledgement that something needed to be done. The rise in kerosene by Rs 2 a litre and cooking gas by Rs 50 a cylinder are bolder moves, but insignificant compared to the scale of the problem.

In fact, what the government really did was take one tentative step forward and three-quarters of a step backwards. It chickened out of a real increase in petro-goods prices for fear of political criticism and popular backlash - of which there is no shortage.

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This is what it did: while raising the prices of diesel, gas and kerosene, it cut customs and excise duties sharply on crude oil, petrol and diesel, which will cost the exchequer Rs 49,000 crore in lost revenues.

Surprise, surprise, the hike in prices is almost equal to the same amount: the hike will reduce the losses of the oil companies from a projected Rs 1,71,140 crore to Rs 1,20,000 crore - a drop of around Rs 51,000 crore.

Was all this brouhaha then about passing on a net cost increase of Rs 2,000 crore to the public?

In short, what the government has done is shift money from the tax revenues bucket to the oil companies’ kitties to prevent a further drain on its leaky subsidies tank.

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[caption id=“attachment_31486” align=“alignleft” width=“380” caption=“People shout slogans against UPA government during a protest against hike on fuel and LPG prices in Ahmedabad on Saturday. PTI”]  [/caption]

But even this exercise is far short of what is needed. According to calculations by Business Standard, even after the hike, diesel is being subsidised to the tune of Rs 6.22 a litre, kerosene by Rs 24.56 a litre and cooking gas by Rs 331 per 14.2 kg cylinder.

And with Rs 1,20,000 crore of losses still projected for the year by the oil marketing companies, Finance Minister Pranab Mukherjee will have to dig deep into his pockets in a slowdown year to subsidise the oil companies.

Politically, this was the best possible time to push through hikes since there are no elections scheduled for the rest of the year, and, for the time being, the UPA government seems to have seen off all challenges - Baba Ramdev, Anna Hazare, et al.

There could, however, be another explanation for the low level of hikes: more coming later this year. This may just have been a trial balloon to gauge public anger.

The other possibility is that the government is hoping that oil prices worldwide will crash and bail it out. That makes the UPA overdependent on luck. It is already praying for a good monsoon (now in doubt, following the IMD forecast of a “below normal” monsoon); now it wants a global fall in oil prices (again, a possibility only if the world economy crashes).

But then all bets are off.