Here is another way of looking at the price cut in petrol, diesel and LPG announced late Wednesday after approval by the Cabinet Committee on Political Affairs — consider it as a mini-stimulus package which manages to put some money in almost every pocket, and also perk up sentiment. And that too for an outlay of a mere Rs 1,100 crore a month, according to the initial cost estimates. This is a small drop in the subsidy ocean of Rs 106,000 crore estimated for the April-December period. The move will give some boost to the beleaguered auto industry (which should additionally be helped by the drop in interest rates), further temper inflation and perhaps indirectly stimulate a few decimal points more of economic growth during the current quarter. And to top it all, the government will get some brownie points with voters before the electoral code of conduct kicks in and before oil prices firm up.
According to one view in the government, oil prices are expected to move up in the near future as the production cuts by OPEC countries, totaling over 4 million barrels per day since September, take effect. The Indian basket of crude oil has already crossed the $40 a barrel mark, after going down to $35.83 a barrel last month. This would point to the need for moving down the price curve slowly, since a move up the same curve has been seen as very difficult indeed. As it happens, the government has left some cushion by not going the whole hog in cutting prices. The margins on petrol were Rs 7-8 per litre and the price cut of Rs 5 per litre leaves a cushion of Rs 2-3 per litre. Ditto for diesel, where a cushion of just under a rupee remains after the price cut of Rs 2 per litre.
The problem arises elsewhere. In the case of LPG, the under-recovery — or the gap between the selling price and cost — goes up to Rs 57 from Rs 32 per cylinder. In other words, the fundamental disequilibrium in the oil economy has been made worse—which is why this newspaper had argued against the price cuts. Other than the continued subsidies that will have to be paid out for petroleum products, the government has failed to chart out a road map for market-linked pricing, although this was a golden opportunity for doing so. If the government has no business to be in business, it certainly has no business deciding the price of petroleum products on parameters that are clear to no one. Such moves will again deter private sector refiners, who were looking at re-entering the retail market.
The stated objective of this obfuscated structure of pricing followed by the government, which wears its socialist heart on its sleeve, is to help the “common man”. Yet everyone within the government and outside it knows about the diversion of subsidised LPG for industrial use. Subsidised diesel is used to run gas-guzzling sports utility vehicles, and run captive power plants. Kerosene is used to adulterate other petroleum products, like petrol—indeed, at the given margins, the business of being a retail seller of petrol and diesel makes sense only if you assume some level of adulteration. The frustrating point is that the merits of direct and targeted subsidies have been debated and discussed ad nauseam, yet it never gets reflected in actual policy. And so, an ideal window for fundamental pricing reform has been missed, and soon the window will have closed.
