The story of petrol regulation in India is fast turning out to be the Panchtantra tale of mouse-turned-maid-turned-mouse.
For beginners, the fable is as follows: A mouse falls from the clutches of its predator bird near a hermit. The hermit asks god to turn it into a beautiful lady. He wishes to marry her off to the mightiest in the world. But the maid-turned-mouse likes none, as she spots some or other shortcoming with every match her guardian brings. Fed up, the hermit calls in a mouse, who she thinks is apt for her. The hermit has no other way but to turn her back into a mouse.
And now, the saga of oil companies: The oil companies got the government to decontrol petrol and natural gas after years of clamour. After the decontrol, which should have ideally allowed the companies to charge market rates on these fuels, the government still kept a strong upper hand on pricing decisions for fear of political repercussions. The companies are loosing a good deal more than Re 1 loss on every litre of petrol sold due to this. Fed up of widening losses, Indian Oil Corporation is now making a strong pitch for going back to the earlier administered regime for petrol.
Pressure is mounting on the government to do something. Reuters
“We have to either increase prices or petrol should be made a regulated commodity again. The consultation process with the government is on. This is the easiest solution and will mitigate the burden on customers,” IOC Chairman RS Butola has been quoted as saying in a Mint report.
These are just parallels. The government is no God, as we all know the hard way, and the petrol deregulation policy of the government, or oil companies for that matter, is no mouse or maid.
Economic Perils
Had the government been God, bridging an ever widening fiscal deficit — the difference between revenue and expenditure of the government — would have been done in the snap of a finger. But unfortunately (fortunately so, for the people) there are no godly powers wrested with the government.
And this year’s deficit has already hit 37 percent of budget estimates, that too in just three months after the start of the financial year.
In the Budget, the government has set a target of Rs 5.13 lakh crore for fiscal deficit. The oil companies’ under-recovery from selling diesel, LPG and kerosene at discounted rates is now estimated around Rs 1.6 lakh crore.
“Going by the trend, the government might have to shoulder 60 percent of the total oil subsidy this year, too, amounting to Rs 96,000 crore, while its year’s budget provides for just Rs 40,000 crore,” a report in Business Standard Smart Investor said.
The tight financials are already making it difficult for the government to keep its promise to give Rs 17,000 crore to IOC, HPCL and BPCL — the compensation announced in May to help these companies declare a profit in 2011-12.
(An earlier Firstpost article titled “Oil cos’ profits are largely fiction: It’s done with mirrors” had said taking an advantage of the “reported” profits, politicians demanded petrol price cuts since the OMCs were making “huge” profits.)
Now, consider the government bringing petrol back to administered pricing regime. The fuel subsidy will shoot up to obscene levels, speeding up a downgrade from rating agencies.
Moody’s Investor Services has a Baa3 investment grade rating on India, just one notch above the junk status.
Though just coincidental, IOC and HPCL announced their earnings on a day when Moody’s Analytics came out with a scathing report on India’s political economy.
The government has badly lost its way, it screamed, piling up pressure on the government to take a few hard decisions, including cutting fuel subsidy.
With reinstatement of P Chidambaram in the office, hopes have been floating around that the government may finally act on cutting the diesel subsidy, which is largely benefiting the undeserving.
A viable solution
In a bid to ward off protests that prop up whenever petrol price is increased, the government is now planning to allow companies to change process on a daily basis. At present, the petrol price revision is done fortnightly.
The government is also considering a cut in excise and customs duties on petrol to offset the under-recovery on petrol, a report in the Indian Express said today.
The extent of the duty cut will be only decided later. According to the report, the loss per litre of petrol for companies is Rs 3.56 now.
A cut in duty looks to be the most viable solution for the time being, given dismal outlook for inflation that is seen spiralling higher with the deficiency in rains.
The faster Chidambaram acts, the better for the economy.
But it is just the economy, after all.
