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Who derailed India's petro reforms?

May 13, 2008 12:08 IST

Poor Ram Naik and Mani Shankar Aiyar! They got all the blame for messing up with oil prices and halting the reforms that had been initiated with the proposed dismantling of the administered pricing mechanism for oil products from April 2002.

First, it was Ram Naik. The Vajpayee government had decided that petroleum product prices would be fixed by the oil companies, not the Union cabinet, in keeping with the trends in the international market. A time-table for implementing the dismantling of the APM for oil products had also been prepared.

Ram Naik, petroleum minister at that time, decided to implement that decision, but with some reservations. He allowed the oil companies to fix the prices of petrol and diesel (leaving out liquefied petroleum gas) every month, but only after consultations with the petroleum ministry.

The Union cabinet gave up its power to decide and approve petroleum product prices. The oil companies got some freedom. But the petroleum ministry under Ram Naik expropriated from the Union cabinet the power to give its green signal to any price change decision the oil companies wanted to enforce.

Not surprisingly, there were no changes in petroleum product prices for almost about a year before the Vajpayee government went in for the general elections in 2004. Even if the oil companies had mooted a price increase or adjustment during that period, the petroleum ministry would have shut them up. Consequently, no price change was effected. That was a big blow to reforms in the petroleum sector.

Mani Shankar Aiyar, as petroleum minister under the Manmohan Singh government, pushed petroleum product pricing to the same direction and in fact expedited the process of reversing the reforms initiated in this sector.

Instead of repairing the damage already done, Aiyar restored to the Union cabinet its power to decide and approve prices of petroleum products - particularly those of petrol, diesel and liquefied petroleum gas. Whatever price hike decisions were taken under Aiyar as the petroleum minister came only after obtaining the green signal from the Union cabinet.

All this happened, while a decision to dismantle the APM for oil products from April 2002 had been taken and no subsequent government thought it fit and proper to at least amend or change the decision.

It became clear that reforms in this country, unless endorsed by legislative changes, could be rolled back quite easily and without any problem. No wonder, foreign investors are always apprehensive of a roll-back of the relaxations in the foreign investment norms in India, as most of them are not endorsed by any legislative change.

In all these years, the blame for having derailed petroleum sector reforms fell squarely on Ram Naik and Mani Shankar Aiyar. It was argued that these two petroleum ministers, under two different governments, did not take full advantage of relatively low levels of international crude oil prices by allowing the oil companies the freedom to fix prices.

Murli Deora, Aiyar's successor, could also be held responsible for having done precious little to distance the government from decisions on petroleum product prices.

But with inflation staying above the 7 per cent mark for the last several weeks, the truth about who all were behind derailing petroleum product pricing reforms seems to be out in the open. It is clear that both the governments of Atal Bihari Vajpayee and Manmohan Singh benefitted from the decisions to deny the oil companies the freedom to fix petroleum product prices.

Naik, Aiyar and Deora might have got the flak, but both the governments had gained immensely by keeping a check on oil prices and, thereby, restricting the inflation rate to a more benign level.

Now that the inflation rate has gone up to politically unacceptable levels, the thought of raising petroleum product prices makes all the reform-minded ministers in the present government shudder. The public sector oil companies are bleeding as the international crude oil prices are hovering over $120 a barrel.

But not one of those reform-minded ministers has come out in the open in defence of allowing the oil companies the freedom to raise prices and at least reduce their losses.

Not one of them is saying that the oil companies should be free to raise the prices just as the government is free to provide explicit subsidies or reduce taxes, if it has to protect consumers against such price hikes. So, why only blame Naik, Aiyar and Deora?

A K Bhattacharya