FE Editorial : Oil conundrum

Written by The Financial Express | Updated: Jan 18 2013, 05:43am hrs
Will oil PSUs hike diesel prices regularly

Has the government pulled off the biggest reform move in recent months, or has it just flattered to deceive on the eve of the Congress partys internal deliberations on the political environment in the country, including the spate of anti-government protests ranging from Anna Hazare to the anti-rape ones To begin with, the Cabinet offered a big sopR9,300 crore in a full yearby increasing the number of subsidised cylinders that each household can get, from 6 in a year to 9 now. Given there is a subsidy of R490.5 per LPG cylinder, there is no case for hiking the subsidies, more so since, as the Kirit Parikh committee pointed out, consumer incomes have increased significantly over the last few yearsin other words, consumers can afford to pay the market price for 3-4 cylinders. Oil ministry data, cited by the government when it brought in the 6-cylinder cap, was that the average use of cylinders was about 7-8 cylinders a year.

It is in the Cabinets decision on diesel that the greatest confusion persists. The Cabinet Committee on Political Affairs allowed the public sector oil marketing companies (OMCs) to hike diesel prices. Since the markets took this to mean OMCs would regularly increase prices till the R9.6/litre under-recoveries are abolishedthis adds up to a subsidy of over R1 lakh crore in a full yearshare prices of all oil stocks rose dramatically. While IOC rose 6.6% yesterday, Reliance rose 3.4% on hopes the private sector company would be able to sell diesel in the local market once subsidies were removed. Finance minister P Chidambaram, however, repeated that OMCs had been authorised to make only small changes and that he was not revising his estimates of the oil subsidies. This did not, however, stop news agencies from quoting unnamed government sources to say a 50 paise hike would take place each month on every litre of diesel, while bulk buyers like the Railways and state road transport corporations would have to pay market prices almost immediately. For the bulk buyers, this means a 27% hike in diesel prices. The fact that the Railways hiked passenger fares by 12-14% last weekthe subsidy on passenger fares is R25,000 crore at the momentlends credence to the possibility that diesel prices for bulk buyers will be rationalised soon.

However, it would be prudent to adopt a wait-and-watch policy given the way the government has back-tracked on previous reform moves, the most recent of which was Thursdays decision to increase the LPG cap from 6 to 9. Also keep in mind that while petrol has been a deregulated fuel for several years, its prices have not been raised each time global prices have either gone up or when the rupee has lost value. At the time the big R7.5 per litre hike took place in May, this was after a period of six months in which OMCs were not given permission to raise prices even though they collectively lost R4,650 crore due to the under-recoveries. Fingers crossed.