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Fuel prices turn non-combustible

A K Bhattacharya | April 22, 2003

Petrol prices went up by 22 per cent in the last 12 months. Diesel prices saw an even higher increase of 27 per cent in this period. These are not small increases.

You might argue that international crude oil prices also moved up at the same rate. So is the Indian consumer fretting over what looks like a steep increase in a year?

If you look at the sales figures compiled by the oil companies the growth in consumption has been normal. There has been no sharp drop or even a deceleration in consumption growth.

Yet if you confront anyone with the fact that the price increase last year was as steep as 22 to 27 per cent, he is likely to feel unhappy and start looking for reasons.

And he might discover that the sharp increase in the price is all because this is the first year after the administered pricing mechanism for petrol and diesel were dismantled in April 2002.

He might also realise that he is now exposed to the impact of global oil price movements that can hit him hard as it did in the first year of free pricing.

When was the last time the prices of petrol and diesel were increased by such a steep margin? In recent times, the only increase by such a margin took place in 1990 when the National Front government imposed a 25 per cent surcharge on petrol and diesel prices.

Petrol and diesel prices have been increased periodically since then, but the total impact of such increases in one year has rarely exceeded 20 per cent.

In 2000-01, for example, the total increase in petrol prices was only 10 per cent. Diesel prices, of course, went up by 21 per cent, but that was because a correction was required in view of their artificially low levels.

And what happened in 2001-02 was unprecedented. Petrol prices actually went down by about eight per cent. So did diesel prices, although by a smaller margin of about three per cent.

In India, petrol or diesel price increases have always been a matter of intense political debate. Before APM was dismantled, every time the government felt the need to increase prices, the Cabinet would convene a meeting and decide on the price hike.

Ministers used to dread the adverse impact the price hike would have on the government's popularity. A strike would often be one of the consequences of such a decision.

But once the government decided to dismantle APM, many politicians should have heaved a sigh of relief. Because from the day APM was to be dismantled, the government could no longer be blamed.

The price hike could be attributed to changes in global crude oil prices.

In retrospect, it appears that the government handled this issue cautiously and quite competently. After the date of the dismantling of APM was fixed for April 1, 2002, the government decided to gradually apply corrections in the price levels.

This essentially meant that petrol and diesel prices declined by eight and three per cent, respectively in 2001-02. Coming as they did after an increase of 10 per cent for petrol and 21 per cent of diesel in 2000-01, the decline in the year before the dismantling came as a pleasant surprise.

And when the petroleum ministry decided to expose consumers to global price movements and change the prices every fortnight, the resistance was hardly noticeable for three reasons. One, the extent of the increases was always kept at a low level.

Two, the prices were not just raised, but brought down to convince doubting consumers that globalisation meant a two-way movement of prices. And three, the oil companies made the price changes as frequent as possible.

Thus, the prices of petrol and diesel were changed as many as 16 times in the last one year. Of these 16 revisions, four changes were reductions and the remaining 12 were marginal increases.

Except three increases, which ranged between one per cent and 2.4 per cent, all the other hikes were below one per cent. The impact of each increase was reduced in this way.

So, today when the minister for petroleum and natural gas, Ram Naik announces that he will consider another decrease in petrol and diesel prices in the coming fortnight, consumer confidence in the new pricing regime increases.


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