Free Petrol

We are very fortunate indeed: another window of opportunity has opened to fix India’s absurdly over-regulated fuel price mechanism. Such moments are rare. They require a combination of circumstances: most crucially, they require the world price of oil must not be too far away from the administered domestic price. Currently, oil prices worldwide are moderate; but, as Petroleum Minister Murli Deora said on Monday, this is not likely to last too long. And what would happen if prices went up without the government deregulating the domestic market? Once again, the Centre would be forced to subsidise the big state-run oil marketing companies — which, otherwise, would be run into the ground by enormous “under-recoveries” — which is how those in the sector refer to their government-mandated losses.

But we are still suffering from the enormous fiscal hole left over from the last time this happened. And, were it to happen again, with the deficit now at 10 per cent, the government simply does not have the money to do it again. Not only that, the oil bonds that the Centre issues in order to underwrite our cheap petrol serve as part of nationalised banks’ assets — but not any that they can lend against, a factor which makes the current credit shortage worse.

So deregulation has stopped being the correct thing to do and become, simply, the only thing to do. No rational view — such as that, say, of the Kirit Parekh Commission on oil prices, the last piece in the puzzle — would think otherwise. And the basic disconnection of domestic and international prices must be followed by wholesale rationalisation of the silly and counter-productive cross-subsidy regime that leads to perverse and inefficient outcomes. Yet, although the argument has been made several times before — indeed, even though it has, intellectually, been won — too many opportunities have been missed. The last time prices were low was one such. Another was when they were high, but had started to fall. A rational, depoliticised mechanism that automatically adjusts prices must be in place before prices start to rise again — otherwise the political pressure to insulate us from the inevitable inflationary consequences will again become strong. Neither the UPA nor the taxpayers want to be in that situation. The time to act is now.

Source:Indian Express

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