By raising petrol, diesel prices govt passes test on oil deregulation; LPG next?

The hike in petrol and diesel prices by 82 paise and 61 paise a litre, respectively shows that the government has passed its first, small test on fuel price deregulation. It is a ‘small’ test because deregulatory intent can really be convincing only when prices are raised at politically sensitive times. Thus far, we have only seen 10 consecutive cuts in petrol and six in diesel since October. The Narendra Modi government’s stated intent is clear, but its actions still leave room for suspicion that whispers from the petroleum ministry carry weight with the oil companies. For example, the sharp cuts of over Rs 2 a litre in the week before the Delhi elections - though in consonance with the policy of fortnightly revisions - appeared too large in the context of firming global oil prices and the huge inventory losses the oil companies were scheduled to report this month. Crisil has estimated inventory losses of Rs 16,000 crore for the oil marketing companies (OMCs) in the October-December quarter, when global prices crashed. Inventory losses happen when the petro-product stocks you hold have to be valued lower on your books due to a fall in market prices. But this inventory loss can be covered up if oil prices rise and the stocks get valued higher in the next quarter. [caption id=“attachment_2017211” align=“alignleft” width=“380”] Representational Image. Reuters[/caption] However, inventory losses aren’t the real issue here. It is about whether the government will let oil companies now manage their pricing without the heavy hand of the petroleum ministry pushing them. The only way to get rid of the perception that government is not dictating prices is to make this crystal clear. There are a couple of ways of doing this. First, Petroleum Minister Dharmendra Pradhan should formally tell the oil company boards that they should take all future calls on pricing and the ministry will not give behind-the-scenes directions. This statement should be repeated through a public policy statement, not just made behind closed doors. Second, the policy of fortnightly revisions should be scrapped. Boards should now be free to decide on daily price revisions, or weekly or whatever. I would suggest daily price revisions both ways, so that price hikes stop becoming regular news stories for the media. Small increases or decreases of 5-10 paise daily will take the sting out of oil politics. Third, the Competition Commission of India should be asked to check cartelisation between public sector oil companies. It is unlikely that all three public sector oil companies – Indian Oil, BPCL and HPCL - have the same cost structures and the same refining margins. They need to take price calls separately. CCI should watch their pricing practices closely. Fourth, to prevent a slideback from deregulation, a date should be set for cooking gas (LPG) decontrol. With subsidies are already being routed through bank accounts, and with all LPG consumers due to be shifted to cash subsidies by April-May, 1 April should clearly be the date for LPG deregulation. This means the government should announce the level of fixed subsidy it will pay per cylinder from 1 April. This announcement can be made in the budget or even earlier. As things stand, LPG under-recoveries of OMCs were at Rs 140 per cylinder. To be on the safe side politically, the government could fix an upper limit of Rs 20 per litre of kerosene and Rs 200 per cylinder to ease the shift to market prices. Fifth, the last stage is kerosene - admittedly a more politically sensitive item. The NDA should launch cash transfers in kerosene using the Jan Dhan bank accounts and other regular bank accounts from 1 April, and schedule it for completion by the end of the year. A fixed subsidy per litre (perhaps around Rs 20) should also be announced around that time. The kerosene subsidy is currently around Rs 13.32 per litre. The major tests for deregulation lie ahead. Chance has given the Narendra Modi government a historic opportunity to be the moving force behind the biggest reform in energy pricing. He should not flunk it.