Fuel prices to increase, finally?

Fri, 25 Jun Pre-Open

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The empowered group of ministers (EGoM) will meet today for deciding on the fuel pricing policy. There is wide spread speculation in the media that an increase in the rates of petrol is likely. You see, oil minister Murli Deora wants to free petrol prices from government control. That would trigger a hike of Rs 3.7 per litre. Of course, the minister is right. The economic burden of subsidised fuel is hurting oil marketing companies (OMCs) - Indian Oil, BPCL and HCPL - severely. They incur a loss of Rs 3.7 per litre of petrol, Rs 3.8 per litre of diesel, Rs 18.8 per litre of Kerosene and Rs 261.9 on every 14.2 kg cylinder of LPG. Every single day, that amounts to losses to the tune of Rs 2.2 bn.

In any case, the practice of the government standing between high crude oil prices and the Indian consumer is an unhealthy one. It blurs the price signals that consumers receive. Energy is expensive and market prices would shape usage patterns to that reality. Right now, the government and the OMCs take the hit. The consumer has no incentive to rationalise consumption.

A hike in petrol prices may be doable. It is regarded as the rich man's fuel. However, diesel is a different matter altogether. Much of India's transport sector runs on diesel. Any hike there would trickle down to the broader economy. Given the worrying inflation situation, the government cannot risk that. Then there are the political compulsions. Fuel price is a sensitive matter. Opposition parties stage walkouts and organise agitations. It becomes an election issue - something all political parties are naturally sensitive to. In fact, the last time the EGoM met on June 7th, the meeting could not proceed because key ministers - Mamata Banerjee and Sharad Pawar - did not show up. Importantly, they are from parties which are crucial allies in the coalition. Hence, it is expected that diesel prices may be raised by Rs 2 per litre, and not by Rs 3.8 that would make it market-linked. Similarly, a Rs 25 per cylinder hike in domestic LPG rates and a marginal increase in kerosene prices would need the approval of the allies.

In our view, the oil ministry is right in wanting the deregulation of fuel prices. International crude prices are at a point where the impact of freeing of fuel prices can be absorbed by consumers. It would also help the government shore up its finances. Freeing of petrol prices would reduce the fiscal deficit by about Rs 50 bn. But that's just the economics. Politics is a different ball game. Even if the EGoM frees fuel prices today, the bigger question is: will they stick to their decision in the face of a political backlash? Also, will they hold their nerve when crude prices start spiking in the future? We doubt it.