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Oil: Why dual pricing makes sense

April 25, 2007 14:18 IST
On April 1, 2002, the Vajpayee-led National Democratic Alliance government dismantled the administered pricing mechanism for the oil sector.

Ram Naik, the petroleum minister at that time, announced the dismantling of the APM and the launch of the free oil-pricing regime with much fanfare. There were some doubts about the date of its enforcement, but Mr Naik stuck to his commitment.

The APM dismantling was to have ushered in two big changes. One, the public sector oil-marketing companies should have become free to price their products in keeping with international prices. And two, the Oil Pool Account and the Oil Co-ordination Committee (OCC), which kept the APM going, were to be wound up.

In all fairness, it must be conceded that even after dismantling the APM and winding up the Oil Pool Account and OCC, the goal of free pricing of all petroleum products had not been achieved.

For instance, prices of liquefied petroleum gas (LPG) and kerosene were not fully freed. Worse, the state-owned oil companies were not bold enough to seize the opportunity and assert their independence in pricing products like petrol and diesel.

As a result, pricing decisions indeed came out of the Union Cabinet's jurisdiction, but the petroleum ministry kept its stranglehold on prices. Only after the ministry gave its nod of approval could the oil companies muster enough courage to announce any price change.

In the two years before the NDA government's tenure came to an end, prices of petrol and diesel were allowed to be changed initially once every fortnight and later once every month.

While prices went up several times, there were also a few occasions when the domestic prices fell because of a downward revision in international crude oil prices. Even though the LPG and kerosene prices were not freed and the petroleum ministry did not give the oil companies full freedom on prices, there was some relief that the APM was a thing of the past, the hidden subsidies on petrol and diesel had ended and that more reforms would surely be initiated to give the oil companies complete pricing freedom.

Alas, such hopes were misplaced. The United Progressive Alliance (UPA) government turned the clock back on petroleum sector reforms. In the first stage, the petroleum ministry under the UPA regime took away whatever powers the oil companies had to fix petrol and diesel prices.

In the second stage, the decision to revise petrol and diesel prices was vested back in the Union Cabinet. With the government usurping the oil companies' basic right to fix prices, any decision on price revision became politically controversial. Thus, the government had to examine the political implications of a price revision before it could even moot such an idea.

If an election was round the corner, the proposal would be deferred. Never mind as a result of such prevarication, the oil companies have been suffering huge financial losses.

This has forced the government to devise a novel scheme of issuing bonds to the oil companies to compensate them for their losses. Bonds worth Rs 17,263 crore (Rs 172.63 billion) were issued to the oil companies in 2005-06.

Last year, the value of such bonds increased to Rs 19,150 crore (Rs 191.50 billion). Thus, government subsidies have made a comeback in the guise of bonds. For every litre of petrol an oil company sells today, it incurs a loss of Rs 4.

The under-recovery on account of diesel is Rs 2.60 a litre, for kerosene it is Rs 12.75 a litre and for a 14-kg cylinder of LPG, the under-recovery is Rs 173. The daily loss the three top state-owned oil companies incur as a result is now over Rs 100 crore (Rs 1 billion).

For any relief, these companies now look to the government for it to wait for the right politically convenient opportunity to approve a price hike. Nothing could be more preposterous than this!

Is there a way out? Perhaps, the state-owned oil companies should get together and embark on an innovative strategy to beat the government at its own game. Remember the dual pricing strategy introduced by the government for industries like cement and sugar?

In a bid to compensate the beleaguered cement and sugar industries in the 1980s, the government of the day had allowed them to sell a specified percentage of their total production at market-determined rates and the rest at government-fixed prices. Why can't the same formula be used for the oil industry?

True, this is not an ideal solution to the problem. But in India, where reforms succeed mostly when initiated by stealth and are always a matter of two steps forward and one step backward, allowing oil companies to make good a part of their under-recoveries through a dual pr

A K Bhattacharya