Deceptive autonomy

On June 15, the UPA government raised the prices of petroleum products for the first time since January. In these six months, international prices of crude soared.

Indian oil marketing companies were caught in a pincer between rising input prices and constant output prices. The decision of June 15 clearly provided them some relief, although the cumulative impact of the preceding six months was not fully offset.

As the minister himself indicated during his press conference announcing the increases, everybody, including the oil companies themselves, would have to bear the burden.

The long lag in adjusting prices and the government's decision to limit the impact on consumers only served to reinforce perceptions that the change of regime effected in April 2002 was only on paper. The spirit of the termination of the Administered Price Mechanism was precisely to take the retail pricing of petroleum out of the political domain.

As opposed to relatively infrequent and, consequently, large adjustments to prices, the new system was supposed to allow mechanical adjustments every couple of weeks in response to global price movements.

Given the frequency, the adjustments were likely to be quite small and, therefore, would not cause the kind of dislocations that the earlier practice did.

In reality, however, pricing remained very much in the realm of the petroleum ministry, aided and abetted by the fact that the oil marketing companies were all public enterprises. The autonomy that companies were supposed to get to make routine adjustments simply did not materialise.

At first glance, the recent announcement by the ministry that companies are now free to adjust prices upwards or downwards within a 10 per cent band each way, seems consistent with the spirit of autonomy. But, look beneath the surface and doubts about the substance of the measure begin to creep in.

At the level of broad principle, it is not clear at all as to why 10 per cent is seen as a legitimate upper and, particularly, lower limit to price adjustments. Autonomy requires that oil companies are free to pass on the benefits (and costs) of global price volatility to consumers, regardless of the magnitude of that volatility.

There may be an argument in favour of intervention in special circumstances, but routine movements in prices must be dealt with at the operational level, without any government intervention at all.

In terms of how this supposed autonomy is to be implemented, the ministry seems to have rather rigid ideas about how the band is to be computed. A one-size-fits-all average of landed prices of products will provide the benchmark, around which the band will be set.

This approach completely disincentivises any effort by the oil companies to minimise their input costs. Even with the relative inflexibility of most Indian refineries, there are surely some potential cost savings that companies can achieve by an optimal sourcing and structuring of contracts.

The whole approach simply entrenches the cartel characteristics of the industry and the interventionist inclinations of the petroleum ministry. The leash may appear as having loosened a bit, but let there be no doubt that the handler's grip is still firm.