Fuel prices: Why China scores over India

Wed, 19 Oct Pre-Open

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As India and China are the main contenders as far as emerging Asian economies are concerned, it will be worthwhile to compare both on the basis of policies regarding the key growth driver-the energy sector. Against expectations, international crude oil prices have shown a decline recently. The trend in the prices of crude oil, imported to the extent of 80% by India and being a key raw material to the final fuel products, should be reflected in the final motor fuel prices. However, that would be an ideal world situation. With both India and China subsidizing their fuel products, some distortions are inevitable. Still, what is surprising is that while China has been able to pass through this decline to its consumers, this has not happened in India.

Probably, the answer to this lies in the pricing policies for this fuel in both the countries. While China still maintains a sense of realism by closely linking its retail prices to the international price, in India, the international trends do not make much of an impact on the government which regulates prices for fuels. The potential implications become even starker when the exchange rate factor is considered.

In China, the prices of oil products are regulated by a state owned body that adjusts wholesale prices of petroleum products when international prices move beyond a certain band over a certain interval. For close control, the band width and time interval has seen a gradual reduction over the years.

Back home, this is how it works. While petrol prices have been freed recently; diesel, kerosene and domestic LPG are still regulated (with no linkages to the international price trend). This has resulted in a projected loss to the extent of Rs 1,710 bn in the current fiscal. To shield consumers from international price fluctuations, the upstream companies also get roped in (sharing approximately 33% of the burden).

As international prices have relatively softened now, perhaps it is an opportunity for the Indian Government to come up with a pricing mechanism that better reflects the market trends. While this may meet some resistance initially, it is inevitable in the long run as a blind subsidy system cannot continue forever. Moreover, to be in the league of top preferred investment destinations, which will be a key driving factor for its growth, the country will need to take care of its fiscal health that doesn't look good currently. This has largely been due to rising fuel subsidy bills. The new policy will not only relieve upstream and existing downstream companies, but will set a viable business environment for private sector companies as well.