Will prices remain at the present peak? Perhaps not. A US government forecast had put the average price for the year at $25, with year-end prices nearing $20. What is relevant is that even if international oil prices fall to $25 per barrel by the end of the year, India's own oil economy arithmetic will have to be drastically reworked. With a year-round average price of $25, India's oil import bill in the current financial year is likely to be in the $13-16 billion range, compared to $9.6 billion last year. The impact of this on the oil pool account, given current domestic prices, will be a whopping deficit of Rs 12,000 crore by the year-end, nearly twice what it was at the end of the last financial year. Then, the falling rupee means that the oil pool deficit will burgeon even further.
Under the circumstances, the government has to initiate several measures without delay. The first is to raise the prices of domestic petroleum products which are still controlled, like diesel, kerosene and LPG. The issue of petrol prices is somewhat separate as the Indian differential between the prices of diesel and petrol is among the highest in the world, with petrol being 1.6 times costlier than diesel when in most countries it is no more than 1.2 times dearer. But from the viewpoint of perceived equity, petrol prices too may have to be raised. While raising diesel prices, the government must also raise kerosene prices as the latter is extensively used to adulterate diesel. This could have a substantial impact on the home economics of millions of households, but it is equally true that a good deal of the low-priced kerosene is cornered by adulterators. LPG prices too have to be raised as there is no justification for supplying the middle class with subsidised fuel.
These price increases can be moderated if the government can bring itself to lower the import duty on crude, and better still to use the opportunity to shift to a specific import duty from the present ad valorem rate. This will lend stability to the government's revenue from oil imports and also to the oil pool account, which will not be hit by cascading duties resulting from the depreciation of the rupee.
Finally, there is the question of de-regulating the oil sector and allowing prices to find their own level. This is easy when the oil market is soft; deregulating when the market is at a peak is to risk instant disapproval of a desirable policy change. Regrettably, therefore, the government will have to stick with the existing policy paradigm, and find the political will to take the tough decisions forced on the country by the high oil prices.