A K Bhattacharya: Politics of petroleum pricing

RAISINA HILL

If elections are indeed around the corner, the government is unlikely to allow even a moderate hike in petrol and diesel prices.

For some months now, the state-owned oil companies have been incurring a loss of over Rs 180 crore a day because the United Progressive Alliance (UPA) government has forbidden them from increasing the prices of petrol, diesel and liquefied petroleum gas (LPG) even though international crude oil prices have been rising.

They could not have defied the government because within months of its installation at the Centre in May 2004, the UPA regime had partially rolled back the previous government's decision to free petroleum product prices. As a result, petrol, diesel and LPG prices were once again subjected to government approval, while the prices of all other petroleum products continued to be decided by the oil marketing companies. Kerosene prices were never freed and they continued to remain under government control under the current regime.

There were three consequences of the roll-back. One, the political leadership took upon itself a responsibility that its predecessors (the Vajpayee government) had managed to leave to the oil companies. To be sure, even the Vajpayee government had not completed the process of dismantling the administered price regime for the oil sector. On LPG and kerosene prices, there was no freedom for the oil companies. But it had at least allowed the oil companies to fix prices of petrol and diesel, subject to the petroleum ministry's clearance.

But Mani Shankar Aiyar, as the petroleum and natural gas minister in the early days of the UPA regime, squandered away even that gain and made petroleum product prices a political issue, to be resolved by the political leadership through a Cabinet decision. The advantage of letting the market forces decide these prices was lost. Of course, if vulnerable sections of society had to be protected, specific measures could have been devised. But failing to devise such measures and instead dealing a blow to the entire petroleum sector in order to protect the poor was a debatable move.

Two, all the oil companies have taken a big hit. And not just in terms of their financial performance "" their scrips have plumetted to 52-week lows in the stock market. With the government no longer infusing capital to finance their expansion plans, these oil PSUs have no option other than to rely on the market to raise resources (Worse, the government is actually encouraging cross-selling of shares among oil PSUs, so that the government gets some resources through the disinvestment route). Depressed stock prices, as a result of all this, do affect their ability to raise capital at competitive rates.

Three, the inflation rate, computed on the basis of the rise in the wholesale price index (WPI), has been brought down below the 4 per cent mark. If the oil companies had been allowed to raise petrol and diesel prices, it is reasonably certain that the WPI-based inflation rate could not have been controlled at this time of the year. Thus, by forcing the oil companies to take the hit, the government has achieved its larger macro-economic goal of achieving stable prices and moderate inflation.

Of the three consequences, nobody in the government or in any political party would lose any sleep over the first two. In fact, rare is the politician in India who would not like to retain discretionary power to decide on anything and everything around us. So, why give up the power to decide on petrol prices, particularly when the adverse consequences of any of such a move will be borne by the oil PSUs? Seen in this context, the third consequence actually endorses the government's move to retain price control.

And if the issue has to be debated at a time when the government may be toying with the idea of going in for a mid-term election in the next six months, only an imprudent politician will even talk about a proposal for a petrol and diesel price hike. Mind you, energy products have a weight of about 15 per cent in the WPI and any increase in their prices could fuel inflation.

So, if elections are indeed around the corner, the government is unlikely to allow even a moderate hike in the retail prices of petrol and diesel, even though the international crude oil prices have reached a new high. The Vajpayee government too postponed a hike in petroleum product prices for several months leading up to the elections in 2004. The UPA government should be no different.