Kirit Parikh panel report watered down

A mountain of labour to produce a mouse — this may best sum up the government’s stance on the thorny issue of pricing of sensitive petroleum products.

In deciding on an immediate deregulation of the price of petrol and effecting only very modest increases in the price of kerosene sold through the public distribution system and of domestic LPG, with only a promise of a freer regime in diesel — though no time horizon is prescribed — accompanied by a hike its selling price, the Centre has carefully weighed in the inflationary and political ramifications of these measures.

The outcome is a congeries of compromises reminiscent of the ad-hoc steps taken on previous occasions.

Neither the exchequer will stand to benefit nor the woes of marketing majors be alleviated to any significant extent. If, the crude prices too tend to firm up, even the benign impact may be illusory.

Inflation is already in double-digits and in order not to rock the boat, the consumer is now obliged to shell out only Rs.2 per litre of diesel, of Rs. 3 per litre of kerosene and Rs 35 per cylinder of LPG.

Given the current crude price, petrol may become dearer by Rs.3.50 per litre. The decision taken by the government smacks of a half-measure, designed to placate those who want radical reforms and those who favour the status quo.

Inflation may now be an excuse to delay deregulation but how many times, the bus has been missed in the past?

Are the latest moves economically justified? How long can the Indian consumer be insulated from the global movements in crude prices?

Moreover, by paying lower prices than dictated by refining costs, the incentive to energy conservation and saving is weakened.

This is critical in an area where our import-dependence is very heavy. Since there is no such thing as free lunch in economics, someone else has to pay the price - in our context, the taxpayer via the government subsidy and oil companies by way of reduced ploughback and return on investment as well as high level of borrowings.

Moreover, what if the Indian crude basket firms up; now it is around $77 per barrel but there is no way of knowing how it will behave. But the undertone is firm and the government may have to wrestle with another bout of price increases if crude moves northward.

The Centre has bought time but the underlying issues are not resolved.

So, ostensibly, the empowered group of ministers who were to take a decision on the Kirit Parikh committee report, preferred to largely ignore it and in stead, fell back to ad-hocism that has been the fixed feature of the official approach to this issue.

In a word, it is goodbye to the bold, new world for the petroleum industry envisioned by the Kirit Parikh committee’s recommendations that mooted, in one go, to eliminate losses of oil companies due to below-the-cost sale of auto fuels and a significant stride toward reduction of the subsidy burden in the budget by revising the kerosene price by Rs 6 per litre and LPG by “at least” Rs 100 per cylinder.

The report had calculated that, at $80 per barrel of Indian crude basket and the exchange rate of Rs 47 per dollar, the selling price of petrol should be Rs 51.66 per litre (Delhi), of diesel Rs 39.92 per litre, of kerosene Rs 30.76 per litre and of LPG Rs.535.42 per cylinder.

But, given the fact that the monthly average price of our crude is more than $80 while rupee is around Rs.47 per dollar, the actual increases now effected in diesel, kerosene and LPG are no where near what is indicated in this report.

This is not all. In petrol, the under-recovery may be nil due to the deregulation of this commodity. But, in diesel, the increase is very small and as such, the problem of under-recoveries will remain and impact on thief financial results.

In regard to kerosene and LPG, the oil marketing companies will not see the end of the tunnel.

But, it is the government that will be seriously affected by the latest half-measures.

For one, the budget has provided for a petroleum subsidy of only Rs 3,108 crore for the current fiscal. For another, it has promised a cash subsidy of Rs 14,000 crore to meet part of the losses suffered by the three marketing companies during 2009-10.

Thus, the budgetary arithmetic has already gone awry.  Now, with only marginal increases in kerosene and LPG, the subsidy bill is set to burgeon. Though the recent spectrum auctions have yielded a tidy over Rs 1 lakh crore, one fears, that much of it may have to be siphoned away by way of subsidy payments.

The fisc will continue to be in dire straits, despite the bonanza conferred by these auctions, thanks to the wholly inadequate increase in kerosene and LPG prices; By transiting to market-driven prices for petrol, the Centre has taken a courageous move - though one wonders why it took so long to make up its mind, given the end-users are the affluent segments of the population.

In deferring a similar action on diesel, for which also the Kirit Parikh committee has made a persuasive case, politics has proved to be a difficult hurdle to overcome.