Good move, but

The government's decision to cut petrol prices by around three per cent on Monday should make consumers across the country happy, specially since this reduces the impact of the sharp five per cent hike announced less than a fortnight ago.

It is a good signal to send for two reasons. One, petrol consumers now know that prices can move in both directions, depending on global trends. The earlier presumption was that they could go only one way - and that was up.

Two, from the political economy point of view, the decision to restrict the cut only to petrol""and not diesel or LPG""sends another strong message to those who would like the government's decisions to defy economic logic.

Ever since petro-product prices were hiked on November 4, the Left parties have been agitating for a rollback. Not only has this not happened, but the government has also declined to play to the gallery by leaving diesel and LPG prices as they are.

The unstated reason for this is that the basic price of diesel was still about Rs 1.50 per litre lower than the global-parity price even after the November 4 hike. By maintaining status quo, the prices are closer to international parity now.

As for LPG, under-recoveries are still very high ""in the region of Rs 150 per cylinder""and there was no earthly reason why prices should be cut even after the dip in global oil.

Further tests of the government's will, however, lie ahead. In the coming months, the government will have to display tough nerves to steadily push LPG prices up by Rs 5 per cylinder every month.

If this is done in a situation where global prices are weak or falling, there will be some tricky explaining to do. The Left, not to speak of the NDA opposition, is sure to ask why prices must be raised when global prices are falling.

More worrisome is the petroleum ministry's heavy hand. Despite the announcement of a scheme to allow oil companies limited pricing freedom within a set band, it appears as if the ministry is still calling all the shots.

The import duty structure is also becoming more meaningless. The current high tariffs enable oil companies to rake in huge profits, but a good chunk of this is now being neutralised by subsidies for LPG and kerosene running into Rs 10,000 crore.

In the case of kerosene, the under-recoveries are said to be around Rs 5-6 a litre. The Left obviously sees no reason why public sector oil companies should not subsidise the poor man's kerosene or the middle class' LPG when the profits are still high.

But if the industry is to move towards market-determined pricing and greater competition, it would be far better to reduce import protection and consumer subsidies at the same time. The sooner oil companies are plugged back to the market, the better.