Waiting for freedom

BS OPINION

If there is no rethinking "" which cannot be ruled out, given the populist pressures the oil sector has been subjected to "" the government will finally turn off its subsidy tap for LPG and kerosene in April 2005.

The irony is that even though the government may stop shelling out close to Rs 7,000 crore as annual subsidy, there is no guarantee that subsidies per se will be eliminated from this sector.

For, over and above the government subsidy, the state-owned oil companies bear an additional annual burden of about Rs 5,500 crore as 'under-recoveries' from the sale of LPG and kerosene.

This is because government subsidy is not enough to meet the difference between international and domestic prices.

That brings into focus the administered pricing mechanism (APM) for the oil sector. This was officially dismantled in April last year.

Since then, the government has been earmarking a flat rate subsidy on domestic LPG and kerosene. The assumption was that the oil companies would be free to revise the retail selling prices of these products in line with changes in international prices.

Over three years, the domestic prices were to have been adjusted to a level where the government subsidy could be phased out without causing any major impact on selling prices.

But kerosene prices have remained unchanged since March 2002, and the prices of LPG have actually been reduced.

Since the government subsidy is at a flat rate, the burden on oil companies on account of under-recoveries has been rising.

In the current year, the oil companies' under-recoveries on account of LPG and kerosene are estimated to spurt by 51 per cent to Rs 8,200 crore.

This distortion has reached such a level that today the retail selling prices of domestic LPG and PDS kerosene are less than half of what their retail prices ought to be.

Any sudden withdrawal of the government subsidy will therefore result in a sharp increase in prices, and explains why the petroleum ministry is now pressing for continuation of the government subsidy for an extended period.

This and other problems in the oil sector will persist if the petroleum ministry continues to frustrate the oil price deregulation decision, and denies oil companies the freedom to fix retail prices in tune with international prices.

With a formal end to administered prices, there is no reason why the petroleum ministry should demand the continuation of the government subsidy on the specious grounds that this will improve the bottom line of the oil companies.

Nor should the ministry look for a solution to the problem of mounting under-recoveries by forcing the oil production and marketing companies to share this burden.

The oil companies have piled up massive under-recoveries because they have not been allowed to revise LPG and kerosene selling prices.

Their bottom line can improve if prices are adjusted over the next one and a half years to take care of their under-recoveries as well as the government subsidy that would be phased out by April 2005.

The problem is that elections are due in less than a year, any price increase now would be politically unpalatable, and Mr Naik has to find a way to pay for his past sins. As of now, the finance ministry stands in the way, but for how long is the question.