Oil prices: UPA misses yet another chance to fix things

The UPA has been particularly inept in its political handling of the oil pricing policy. The flip-flop on petrol prices tells us why.

R Jagannathan November 16, 2011 11:33:57 IST

In one of those famous lines from Wikileaks, a US embassy cable to headquarters in Washington criticised Sonia Gandhi's poor leadership during the nuclear deal crisis and concluded: "Mrs Gandhi never misses an opportunity to miss an opportunity."

The same can be said about UPA-2, where missing political opportunities has become the norm. Bad politics is compounding the problem of bad economics.

A case in point is Tuesday's grand announcement of a cut in petrol prices by Rs 2.22-2.35 a litre barely a fortnight after oil companies raised them by Rs 1.80 because they were bleeding profusely.

Nobody is in any doubt that this cut has been forced by Mamata Banerjee's tantrums, and not by any real fall in crude oil prices. But that didn't stop Minister of State for Petroleum and Natural Gas RPN Singh from claiming that since crude oil prices had come down by $4 a barrel, "we have passed it on to consumers." He maintained the fiction that "petrol prices are deregulated."

Oil prices UPA misses yet another chance to fix things

As we all know, petrol prices are hugely extortionate while diesel is heavily subsidised.AFP

UPA's politicians have missed yet another opportunity. As we all know, petrol prices are hugely extortionate while diesel is heavily subsidised.

So if Mamata Banerjee had to be propitiated with a petrol price cut, it should have been compensated with a diesel price increase. This would have muted the opposition, and even Mamata could not have launched into another tirade after raising such a fuss over petrol.

Look at the number of buses the UPA has missed in oil pricing alone:

Between 2004 and 2008, when the economy was booming, any oil price increase and cuts in subsidies could have been absorbed easily by the corporate sector. It didn't do this.

In June this year, the government raised diesel, kerosene and cooking gas prices to reduce the oil companies' losses by Rs 51,000 crore. Then it shot itself in the foot by reducing customs and excise duties by almost the same amount - Rs 49,000 crore.

What kind of reform is it when you take one step forward and then one step backwards? In one shot, the government moved seemed to move forward on reform and then ruined its own finances.

In the latest hike, the government has done more damage to its credibility. By merely rolling back petrol prices, the UPA's political bosses have sent the following messages:

One, it has no guts to carry out reforms in the energy sector. It will kowtow to every passing political leader who is willing to blackmail it.

Two, it cannot even reform by stealth. A Rs 5 cut in petrol prices balanced by a Rs 2-3 hike in diesel could easily have been justified and explained politically. But the UPA missed the bus - as it has been doing continuously since 2004.

Three, the deregulation of petrol prices is a myth, an eyewash. If it were for real, this decision should have been left to the oil companies.

A Hindustan Times report quotes a frustrated oil company official thus: "Despite the fuel being decontrolled and the government maintaining that it has no say in the fixation of petrol prices, we (oil firms) do seek an unofficial nod from the government before changing prices."

Worse, the government has gotten itself into a deeper hole on energy pricing this time. At current levels of crude prices and the rupee-dollar rate, oil companies are losing Rs 10.17 per litre on diesel, Rs 25.66 on kerosene, and Rs 260.50 per cooking gas cylinder, says BusinessLine.

Between them, oil companies will see Rs 1,30,000 crore of losses this year - which the government will either have to subsidise or compensate though price increases.

The UPA's political management skills are clearly non-existent.

The next opportunity to raise prices will come in December, when wholesale prices are likely to fall (or so we are told): a hike in oil prices should thus not show up on the index immediately.

Let's see if the UPA takes at least this opportunity.

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