Fuel price reforms: How likely?

Fri, 4 Jun Pre-Open

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Hardly anyone would disagree that the Indian government needs to find ways to increase revenues and cut costs. Not all costs are under its control though. Take the case of oil. India needs to import close to 80% of its oil requirements. The price of crude oil swings to the dynamics of the global markets. And in the recent years, it has swung to very high levels. But the Indian government doesn't allow the oil companies to pass on the costs to the ultimate consumer. It reckons a large section of Indian citizens cannot afford the high cost of fuels. And raising fuel prices will be hugely unpopular politically.

Committee after expert committee has made recommendations that this cannot carry on forever. The oil companies simply cannot bear the enormous losses from this under pricing. And the government in turn cannot dole out subsidies to the oil companies. Nothing substantive has happened though. But the situation seems to be changing. At least, the recent spate of announcements seems to suggest that. In fact, the government is looking at the issue of under pricing across the Indian energy industry.

Recently, it revised the price of APM gas upwards. It refers to the gas produced from blocks that the government gave to ONGC and Oil India without holding auctions. As per a leading business daily, these companies will now be allowed to charge market rates (not merely the revised APM rates) for the gas produced from any new discovery in these fields.

Then there is the hike in petrol and diesel prices which seems to be imminent. An empowered group of ministers is set to meet on June 7 to make a decision. Earlier there were doubts whether they will be able to raise prices to the extent required. For example, petrol and diesel prices needed to be hiked by around Rs 6 per liter each to bring them at par with international rates. But with the softening of oil price due to the European debt crisis, the government needs to increase the price by a more palatable figure of Rs 3.5.

Good economics says that they should go ahead with the hike. Moreover, they should follow through by not interfering again if international crude oil prices were to start rising upwards in the future. In our view, that will be the hard part. It is one thing to introduce reforms when conditions are conducive, it is quite another to stick with them when it extracts a political price. We believe, over the long run crude oil prices will go in one direction - upwards . It remains to be seen if the political class will have the gumption to let market forces play out when that happens. We certainly have our doubts.