Diesel price rise a show of courage, but still a half-measure

At long last, the Centre has mustered courage to revise the price of diesel – the holy cow among petroleum products – by Rs5 per litre while opting to maintain the status quo in regard to PDS kerosene and thus leaving the issue of under-recoveries unresolved.

A cap of six cylinders per year may induce greater economy in the use of this fuel. With the under-recovery as high as Rs347 per cylinder (plus taxes), it is surprising that even a modest hike has not been forthcoming. A balancing act, no doubt, but it will still mean the oil marketing companies have to foot a huge bill.

But, pragmatism was to the fore when the government ducked the issue of an inevitable increase in petrol price by the simple expediency of cutting the excise duty by Rs5.50 per litre – that almost matches the upward revision to the tune of Rs6 per litre based on the ruling price of the Indian crude basket and the benchmark Singapore rate – from the current Rs14.78.

This is a clever move intended to mute the criticism at home but clearly this game cannot be played for long.
The fisc will certainly take a hit by this gesture and if crude prices harden in the weeks ahead, more of the same medicine may not be effective or feasible.

But the main question remains: has the Centre failed to take the bull by the horns?

Empirical evidence suggests that this may well be the case. In the case of diesel, the hike of Rs5 per litre is grossly inadequate since the actual under-recovery now is as high as Rs17.05. But this product is a politically sensitive commodity with many linkages across the economy. Besides, it can set in motion another price spiral. The government needs must act with caution, given the political milieu in which it operates.

The flip side is that it may swell the subsidy burden which in the last fiscal stood at Rs81,192 crore. Based on current international prices, the latest hie may make only a modest dent in the under-recoveries and should prices harden – and indications are that they will – things will be back to square one and the oil majors will again bleed.

But, the logic of leaving kerosene prices untouched is hard to understand. Surely, if diesel is made costlier, the same yardstick should have been applied to kerosene as well, With the status quo, the huge under-recovery of Rs27,350 crore last year is certain to burgeon.

Already, the daily loss on account of kerosene at present is as high as Rs32.70 per litre and a further spurt is in the cards if the northward course in crude prices persists.

A sort of rationing system is sought to be introduced in respect of LPG. This idea was mooted often in the past but was not considered seriously at all.
Now, with the use of LPG limited to six cylinders annually, the issue of under-recovery will not simply go away.

Petrol is supposedly deregulated but the Centre has indicated that it wants the status  quo to prevail.

Hence the duty reduction with revenue implications for the fisc.

Again, this can be only a short-term move as both fiscal health and the financial health of the oil marketing companies hinge on the operation of free market forces.

Seen in perspective, the whole exercise skims the surface of the problem while postponing painful decisions to a latter date. Economic sense has taken a back seat, pragmatism is given a good bye and populism wins.

In fine, a small let up in the daily under-recoveries of Rs551 crore is likely for a brief spell of time but soon, things will be back to square one. The government, like the Bourbons, will learn nothing and forget nothing.