The fourth approach ... PDF Print E-mail
Thursday, 31 October 2013 00:02
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… to deregulating oil prices is still going nowhere

The late Raj Krishna often joked that the 6th Five Year Plan was really just the 6th approach to the 1st Five Year Plan, given no fundamental changes had really taken place in the method of planning. Much the same, as the latest Kirit Parikh Expert Group on pricing of various petroleum products suggests, applies to the oil sector. It was in November 1997 that the government first said it would completely deregulate oil pricing; this was followed up, in 2002, with the government dismantling the mechanism that determined fuel subsidies; but not quite since, in June 2010, a decision was once again taken to decontrol prices, this time of diesel. The fourth approach, last January, involved raising prices of bulk diesel immediately accompanied by a 45-50 paise monthly hike per litre—but as compared to R9.03 per litre in January, diesel under-recoveries are, thanks to the rupee’s collapse, currently at R10.51 and account for 57% of the total under-recovery of R1,61,029 crore in FY13—this was a mere R5,430 crore a decade ago in FY03.

The government is unlikely, in the backdrop of elections, to pay heed to the Parikh suggestions to raise diesel prices by R5 per litre or to cap subsidies at R6 per litre for the future; or even to raise kerosene prices by R4 per litre and thereafter raise prices regularly, at least in line with the hike in farm GDP. Nor is it just the elections, Parikh has chaired two such committees before and made similar suggestions—freeze subsidies at a point in time and raise prices commensurate with at least per capita GDP growth—none of which have been accepted. Which makes you wonder why the committee was even set up. Ostensibly the reason was to examine whether, by adopting trade-parity pricing, the government was in fact over-compensating the refiners since this allows them to charge a notional import duty and freight on imports even while none are taking place. While the finance ministry representative has issued a note of dissent to the committee view that the current trade-parity pricing can be continued by pointing out the over-compensation is R13,500 crore annually, this misses the point. Even if you move to export-price parity, you’re still left with a large under-recovery of R1,47,529 crore in FY13, only a very small proportion of which goes to those who could possibly be considered as deserving—in the case of LPG subsidies that account for a third of the total under-recoveries, just 0.07% of subsidies in rural areas go to the poorest fifth of the population and the figure is 8.2% for urban areas. Till the next round of decontrol, and the next Parikh report …


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