Underwhelming

The government's decisions on petrol and diesel pricing suggest that the Prime Minister and his Cabinet are biting the bullet, even if only after long procrastination. That appearance is unfortunately quite deceptive.

Even if the government feels heroic about having got it through, the hike of about 7 per cent in the prices of petrol and diesel pales in comparison with the 26 per cent increase in crude prices since the last price hike for petrol and diesel.

Also, the prices of kerosene and cooking gas have been left untouched, so the average price increase on all petroleum products taken together may cover no more than a fifth of the cost increase.

The net effect is that most, if not all, the oil marketing companies will continue to lose money (on top of the Rs 1,227 crore they lost in the April-June quarter). In short, the price hike solves nothing, it merely provides the illusion of taking hard decisions.

It also makes some situations worse than before. For instance, the incentive to adulterate diesel with kerosene will now be even greater since the price differential between the two has increased.

It makes the subsidy on each cylinder of cooking gas approach the three-digit level, even though cooking gas is mostly a middle-class fuel and has nothing to do with the poor. In other words, the financial hole in the oil economy is today bigger than it was three months ago.

That hole has been sought to be papered over. One device is the proposed oil bonds. How exactly these will work remains to be seen, but they appear to be a device to simply buy time for the oil marketing companies "" who, because of the government's pricing indecision, are no longer in a position to finance their investment plans on the basis of their own resources and creditworthiness.

Some reports suggest that the immediate hit will be on the government's finances "" in which case the Budget deficit has just gone up. The second device for papering over problems is to arrange some transfer of resources from the upstream oil companies to the downstream marketing firms.

The basis for the numbers mentioned is not clear, nor is it obvious how the government will explain arbitrary transfers to private shareholders who have invested in the listed oil companies. Perhaps no explanations will be offered, in the spirit of the times.

What is also difficult to understand is the refusal to look at a transparent system of oil pricing, combined with a rationalisation of duties on the petroleum sector. The switch to specific duties, logical at a time of volatile prices, has not been made.

The cut in customs duty on petroleum products, eminently desirable in order to reduce excessive refining margins, has also not been made. In short, all the structural problems of oil pricing (as different from the oil price level itself) also remain.

One might have thought that on an issue as vital as this, on which even national security rests because the oil companies have been made feeble, the government would provide a full explanation of the options it had, and the reasons for the final choice.

There has been no explanation from the usually voluble petroleum minister. Perhaps this is because the final decisions have nothing to do with economics and everything to do with politics, since the coming Bihar elections are round the corner. It should be obvious that the country is paying dearly for the politicisation of oil pricing.