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The Narendra Modi government’s announcement some weeks ago that diesel prices would be decontrolled was welcomed by all as a bold and pragmatic move initiated by a reformist regime at the Centre.
And why not?
The pricing of two major items in the petroleum basket – petrol and diesel – was now free from government control. The Manmohan Singh government had decontrolled petrol prices in June 2010 and the Modi government followed suit with diesel in October 2014. Public sector oil marketing companies were thus no longer encumbered by the government-regulated, unremunerative prices for two of their main products and the private sector oil companies were now encouraged to enter the retail market to create the much-needed competition in this sector.
But even amidst such jubilation, many experts had expressed the fear that the gains could be short-lived as the move might be reversed and come under pressure if international crude oil prices started going up again.
Well, international crude oil prices have still not begun firming up, but the Modi government seems to have already applied brakes on its reforms agenda for the oil sector. Worse, as always, the public sector has once again taken a big hit as a consequence. And, ironically, the trigger for this setback to reforms and the public sector has come from concerns over the government’s strained finances.
In the last few weeks, the government has jacked up excise duties on petrol and diesel in two instalments. And by rough estimates, the central exchequer would mobilise additional revenues of Rs 24,000 crore in a full year. This would naturally provide much-needed relief for the strained government finances, where the fiscal deficit in the first seven months of the year is already about 90 per cent of the full year’s deficit target. Tax revenues in this period are only about 37 per cent of the annual target for 2014-15 and these additional excise revenues from petrol and diesel would be useful in preventing the deficit from widening any further.
Fiscal policy experts would welcome the government’s firm resolve to shore up its revenues by taking such steps. But the problem arises from the manner in which the fresh taxes have been enforced, defying the government’s earlier promises and principles of having freed the pricing of petrol and diesel sold by the oil companies.
Even as the excise duty on petrol and diesel has gone up, the oil companies have not raised the retail price of these fuels. On the contrary, they have actually reduced their prices, understandably because of steadily falling international crude oil prices – estimated at close to 40 per cent.
But why should the oil companies not raise prices if the excise duty has gone up? Believe it or not, this is because the government while announcing the duty hike on petrol and diesel has given the assurance that there would be no increase in the retail prices of the two products as a result of the excise rate change. That announcement must have preceded some communication from the government to the oil companies not to increase the prices and absorb the duty hit on their books.
What happened to the freedom the government gave to the oil marketing companies in fixing the prices of petrol and diesel? Wasn’t that decision on price decontrol flouted when the oil marketing companies were disallowed to pass on the additional impact of higher excise in the form of a higher retail price?
Remember that the financial hit the state-controlled oil marketing companies will take in a full year as a result of the excise duty hike would be Rs 24,000 crore (almost 0.2 per cent of the country’s gross domestic product) or about Rs 10,000 crore in the current financial year. Essentially, the oil companies have been made to shell out this amount to the central exchequer in the current financial year and take the hit on its books instead.
The government might argue that the oil marketing companies have reaped a huge benefit from the softening international crude oil prices and the decline in retail prices so far does not fully reflect the financial gain they have made. Therefore, by absorbing the excise duty hit, the oil companies have not really harmed their finances. But that decision – on whether the oil companies should absorb the excise hit or not – should have been left ideally to the managers of these public sector companies and not influenced by the government.
Of course, the government was on the right track by raising duties on these products to take advantage of the declining international crude oil prices and reduce its subsidy burden. But the government was certainly not on the right track by taking away from the public sector oil marketing companies the pricing freedom, it had granted to them raising so much expectations about reforms and public sector autonomy.
Worse, the government’s interference in pricing of petrol and diesel on private sector firms would pour cold water on the plans of those private sector companies which may have decided to enter the oil retail business or enhance their presence in this sector after the decontrol of petrol and diesel prices. The private retailers would now have to absorb the additional excise duty hit and match the price of the public sector oil marketers.What about the principle of level playing field even among the public sector and private sector players in oil sector? And, indeed, what has gone wrong with the government’s reforms agenda for the oil sector?
