An empty promise

The government announced at the time of the last round of increases in the prices of petrol and diesel that in future the oil marketing companies would be free to raise prices on their own, without reference to the government. The next price trigger was to be at $70 per barrel of oil. Amazingly, the Indian crude basket has now reached $75 and there is not a word from the oil companies, but the petroleum minister Murli Deora speaks up to say no price increase is on the cards! So much, then, for Cabinet decisions.

The impact this declared inaction will have on the balance sheets of the oil marketing companies is easy to see. For it is inconceivable now that the government will raise petrol and diesel prices when Parliament is in session, as it will be for the next month. The last time round, the government fudged the price issue by spreading the burden all over the place: Rs 28,000 crore would be paid by way of oil bonds, Rs 24,000 crore would be borne by companies that gain from more expensive oil (like ONGC), and the product price hikes themselves would mop up no more than Rs 9,300 crore, against a total gap of Rs 73,500 crore. That fudge cannot be repeated. And the longer action is delayed, the greater will be the damage to the oil companies, and the greater will be the drain on government finances (because the burden will eventually fall on the exchequer).

Apart from the obvious implications of the rising under-recoveries on the balance sheets and expansion efforts of the public sector oil firms, the other major impact of this is being felt by private sector firms like Reliance. Reliance has been trying to increase its retail footprint, but with the state-owned firms forced to sell at prices much lower than what the market needs to bear, Reliance sees no future in the domestic market and has decided to focus on exports; its domestic market share has plunged and it is only a matter of time before the company begins closing down retail outlets. A similar fate awaits other private sector firms like Essar.

This is not the first time such an event has occurred. In the mid-1980s, the government allowed the private sector to get into parallel marketing of LPG. Several firms responded, and set up bottling and distribution networks in the country. But when the public sector oil firms were forced to stick to below-cost pricing, these heavily subsidised gas cylinders slipped into the non-domestic market as well, thereby ensuring that the new private LPG players got very few customers. After investing nearly Rs 1,000 crore, the private players simply shut shop.

Not allowing even a modicum of free pricing in the retail market is the surest way of ensuring that what is a cash-rich and investment-hungry sector gets starved of funds. There is only one solution possible""which is to make the consumer pay the full cost of energy consumed. If that has become impossible because both the Congress and the Communists have made inflation a political issue, the inevitable loser will be India's energy sector, and the end-result will be reduced energy security.