The LPG crisis

The government may well blame commercial users of LPG (and the usual "hoarders") for causing the LPG crisis, and Hurricanes Rita and Katrina for causing supply problems, but the diversion of the subsidised domestic LPG is something that has been taking place for years""in the same way that subsidised kerosene is used in massive quantities to adulterate diesel.

Rational pricing of oil and gas products is the obvious way to minimise market distortions, but a government and political class that are in love with cross-subsidies and state-dictated prices cannot countenance simple answers to the question of why hoarders and adulterators flourish.

Smuggling wasn't minimised by jailing smugglers, it was minimised by abolishing import controls and reducing tariffs. Nor was black marketing in steel, cement, tyres and many other industrial products eliminated by alert bureaucrats and policemen nabbing culprits and hanging them by the nearest lamp-post (as used to be threatened periodically by politicians at the height of the black marketing); instead, it was ended by abolishing price and distribution controls in these products.

What worked in all these areas can work in the petroleum sector too, if the government would only try the tested remedy of relying on the market to sort things out. Administrative action is not a substitute.

Hence, the government directive that oil-marketing firms should identify the increased-demand areas and take LPG supply decisions after getting approvals from officers in these companies of the rank of deputy general managers, will create a lot of busy administrative work without addressing the underlying issue.

In this context, the proposal to bring the oil and gas sector under the purview of the Competition Commission is curious since competitive forces cannot have free play in a sector where price and distribution controls abound. If Indian Oil Corporation, for instance, subsidises LPG supplies by Rs 100 per cylinder, there is no question of a private sector firm being able to compete with it. Nor, for that matter, will Indian Oil be greatly interested in increasing the supply of LPG and losing more money""which explains why the oil-marketing companies are said to be reluctant to enrol new customers.

The Competition Commission cannot order free pricing or unrestricted distribution, since that will run up against the government's diktat. IOC could of course be given suitable incentives from the Budget, to pay for its losses on selling gas. The problem, however, is defining the subsidy.

In telecom, BSNL was given such a subsidy through the access deficit charge (ADC) formula. The cellular operators, who were paying the ADC, argued that it was way above what was required. It didn't help that the telecom regulator has changed its mind on the quantity of the subsidy many times over, so there is nothing sacrosanct about the number.

In short, the Competition Commission is not the answer.