At last

Given how the Left parties have opposed it, and given also the government's dependence on their support, it deserves congratulations for finally hiking petrol and diesel prices. Had it not, the entire net worth of the state-owned oil-marketing companies (IOC, HPCL, BPCL and IBP) would have been wiped out about 1.8 times over, given that their net worth is Rs 41,500 crore and the under-recoveries for the year (prior to the price hike) were Rs 73,500 crore. Since the hike will yield Rs 9,300 crore to the oil-marketing companies, and they'll get Rs 28,000 crore of interest-bearing oil bonds from the government, plus Rs 24,000 crore from other oil-producing companies like ONGC (which have profited from the current price spiral), and Rs 3,000 crore from stand-alone refineries such as Reliance, and so on, the oil-marketing firms' problems have by and large been addressed.

The decision to move to trade-parity pricing, as different from the current import-parity pricing, is also a good one since it will shave off Rs 2,200 crore of extra profits that the oil companies have made. Prior to the changed regime, oil companies used to buy 25-30 per cent of their crude requirements indigenously from ONGC, at a discount of $5-6 per barrel to international prices. Yet, this huge cushion was conveniently forgotten when import-parity pricing was done and customs duty, insurance and freight charges were added to the global price of each product (whether petrol or diesel) even though they were never imported. Since India exports 20 per cent of its production, a trade-parity formula means that costing for price determination has been pushed down to more realistic levels. Reducing the import duty on petroleum products from 10 per cent to 7.5 per cent (while the crude duty remains at 5 per cent) will also reduce the effective rate of protection that these firms get, without affecting revenue since no imports were taking place. This is another step that was long overdue.

It is not clear whether the government has addressed the issue of making petro-product prices market-determined, so that every price hike does not become a huge political challenge. Sanity for the sector depends on reverting to the Kelkar recommendations on the subject. For, even after Monday's price hikes, the under-recovery on petrol prices is Rs 6.55 a litre and on diesel Rs 7.88""based on the current crude price of $71 a barrel. And no attempt has been made to bring the prices of LPG and kerosene anywhere near rational levels either""the subsidy or under-recovery on these two items alone is Rs 25,000 crore per annum. Also, no attempt has been made to shift duties from the current ad valorem structure (where duty collection goes up with oil prices) to a combination of ad valorem and specific duties""which are based on quantity and therefore price neutral. So, when the government says the essence of the Rangarajan Committee's recommendations has been reflected in the changes, this is only partially true.