Now stick to your guns

The Left and BJP response to the government's decision to raise the prices of petroleum products was predictable. The Left pretends to not understand plain economics, and the BJP is in the Opposition, so it will criticise the most rational of decisions.

Global oil prices have doubled, and Indian petro-product prices have gone up by only about 50 per cent, on average. So both the government and the oil companies have absorbed some of the price shock""as should be the case.

The rest has to be passed on to the consumer. The government showed some courage in biting this particular bullet, especially the commendable decision to steadily wipe out the entirely unjustified subsidy on cooking gas, in a little over two years. It should now stick to its guns.

That is not all that has to be done. The Lahiri "task force" is looking at the issue of switching from ad valorem to specific duties on petro-products. When prices are as volatile as they have been, this change is logical""and will prevent the government from getting windfall tax gains (at the expense of the consumer) as oil prices rise.

What is important is to fix the right level of specific duties; revenue parity should not be sought at today's high oil prices. A logical parity level would be at the upper end of Opec's original price band, of $28 per barrel.

It is even more important that the unjustified and widely criticised gap between the level of duties on crude and refinery products should be narrowed, so that refineries don't get an unearned bonus.

But even that would leave the job only half done. The government simply has to stop the irrational pricing of petro-products in a way that gives some of the oil companies a profit bonanza.

You only have to look at the profit records of the different oil companies to see how some have suffered and others gained from today's arbitrary rules. The solution is not to tinker with prices even further but to put an end to government control of prices.

That brings up the last task that has to be undertaken, so that the oil sector has a rational set of rules to play by. The government should go back to the decision of 1997, to end the administered pricing of petro-products in five years.

That deadline came and went two-and-a-half years ago; notional decisions were taken on two occasions by different governments/ministers, in deference to the undeniable logic of the 1997 decision.

But both Ram Naik and Mani Shankar Aiyar have demonstrated that, as petroleum ministers, they have a fundamental problem with the functioning of markets.

They have their different reasons, but neither's reasons are valid. What the government has to do is exactly what it did in steel and tyres and cement: get out of the pricing business, de-politicise oil prices and ensure a competitive market so that it functions efficiently, for the benefit of all concerned.