A sensible balance

The UPA government made its first major economic announcement on Tuesday evening when it increased the prices of petrol, diesel, coal and cooking gas. The increases, as well as their magnitudes, were widely anticipated, and so did not provoke reactions of any significance.

At the retail level, petrol prices were upped by around Rs 2 per litre and diesel prices by half as much. As Mani Shankar Aiyar, the minister for petroleum, pointed out during his press briefing, these increases are less than what the oil marketing companies have had to pay on account of the increase in international crude prices.

From January to June 2004, crude prices (on the West Texas Intermediate benchmark) went up from around $34 per barrel to above $42, an increase of almost 25 per cent. At constant retail prices, the profitability of oil companies was bound to suffer (though, it is difficult to say precisely by how much).

The oil companies were asking for a much sharper increase, but the ministry has given them only half of what they sought. The minister was clear in stating that the burden of higher international prices would have to be shared by all stakeholders "" the consumer, the oil companies and the government.

The government has chipped in by reducing the excise duties on petroleum products, reducing its own revenues in favour of oil company top lines.

All this is as it should be, given how much both the government and the oil companies make out of oil. One cannot quibble with the basic motivation to share the burden rather than load it all on petrol and diesel users.

But, looking ahead, the weight of opinion on the behaviour of oil prices is that they will come down to more sustainable levels over the next few months. On June 2, OPEC announced that it would increase supply with a view to moderating prices. Early this week, the West Texas benchmark price was already down to $37 per barrel, indicating that expectations had been influenced by the announcement.

If the domestic price is de facto an administered one, the government should make sure that it rolls back the price increases as international prices decline. The oil companies have enough cushion in their finances to be able to face this.

The government should be trying to reduce cross-subsidies, not increase them. Which brings up the question of pricing kerosene and cooking gas. That the price of the latter has been raised by Rs 20 per cylinder should give some re-assurance that this government is not the slave of populism.

But the fact is that cooking gas is used largely by the middle class (there are 60 million gas-supplied homes, out of 190 million homes in the country), and there is no justification for subsidising it.

A price increase in LPG should be neutralised by moderating petrol prices "" which would reduce the incentive for the adulteration of petrol with kerosene. Some of this can be done through tax changes, promised in the Budget.

However, long-term pricing policy needs to be addressed too, lest the dismantling of the APM system in turn gets permanently dismantled.