Murli Shankar Aiyar

Two things stood out during Mani Shankar Aiyar's tenure in the petroleum ministry: the enthusiasm with which he pursued "oil diplomacy", working out deals to ensure energy supplies to India from remote corners of the world, and the zeal with which he resisted passing on the burden of rising crude prices to domestic consumers of various petroleum products. His successor, Murli Deora, was seen as somewhat more of a pragmatist on the second issue and there were expectations that after the long bout of state elections was complete, prices would indeed be raised. These expectations were, however, rudely shattered by reports that Mr Deora has himself fallen prey to the price control bug and has cited commitments under the Common Minimum Programme in arguing that retail prices of petroleum products should not be raised. His solution to the problem is to reduce the already reduced rates of indirect taxes on this category of products another notch, thus allowing retail prices to be maintained at current levels.

This is not to question the good intentions of Messrs Aiyar and Deora in wanting to insulate the mass of domestic consumers from high oil prices. However, when these good intentions fly in the face of economic logic, concerns have to be voiced. The country is supposed to have terminated the so-called Administered Price Mechanism over four years ago. The successor regime was to have allowed oil-marketing companies the freedom to quickly adjust prices upwards or downwards, while letting the government decide on the degree to which it would subsidise products like LPG and kerosene. Instead, in the face of persistently increasing crude prices since the outbreak of the Iraq conflict, administered prices are back with a vengeance. While seeming to protect consumers, the reluctance to increase prices is imposing significant costs on some oil companies and on the economy.

First, a crucial response to higher prices is enhanced conservation. Everybody starts to re-organise activities and processes so as to reduce energy consumption. Successful conservation is the best buffer between rising prices and economic performance. Further, frequent, relatively small changes in prices both keep the consumer alert about the situation and allow him to make gradual adjustments in his usage pattern. Postponing the increase to a point where a large adjustment is unavoidable will cause much greater disruption to both individuals and the economy as a whole.

Second, oil-marketing companies, which bear the brunt of retail price rigidity, are no longer the exclusive preserve of government. Two major players have significant, even if minority, private shareholding. To deny these companies and, by extension, their shareholders, their due margins on refining crude petroleum is to violate some basic principles of corporate governance. The government giving up its claims on profits by virtue of its shareholding is itself debatable; treating private shareholders in the same way is definitely not business. Third, given the constraints under which the finance ministry is working to achieve fiscal balance, expecting it to compensate for a clear absence of political will is completely untenable. The only way forward is for the government to increase prices by an amount which will account for both crude prices and normal refining margins, while simultaneously launching a campaign to explain to the public why there is no other alternative.