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Monday , May 12, 2008 at 2119 hrs One of the first things the UPA government had to consider when it assumed office is whether and by how much to increase oil prices. The NDA government had more or less frozen oil prices in the run up to the elections. A similar situation is developing now. The UPA is keen that the next government undertakes major oil price rationalisation. Political compulsions are even greater now because, unlike in 2004, inflation is high and oil price hike will push prices up further. However, the pressure to rationalise prices is higher as well. The basket of crude that India imports was selling for $118 a barrel last weekend. Price fixing by government in domestic market means oil marketing companies lose around Rs 13.50 per litre of petrol, Rs 22 per litre of diesel and Rs 326 per cooking gas cylinder. This fiscal year, the total underrecovery by oil marketing companies is likely to be around Rs 180,000 crore. Last fiscal, 2007-08, the cost of oil price fixing was Rs 77,000 crore. The cost has doubled because oil prices have jumped and the government may be approaching a point of unbearable fiscal strain. If oil, as some analysts grimly predict, keeps getting pricier—$150 a barrel is talked about—can a rationalisation be held off till general elections?
If there was an effective subsidy regime, the government would have had more options. That is, if subsidised kerosene did reach the poor, increasing prices of petrol, diesel and LPG could have been considered. But, of course, cheap kerosene is mostly grabbed by the non-poor, including the shady among them. Indeed, increasing the price of other fuels and keeping kerosene prices unchanged further incentivises diversion of kerosene. This is the classic problem of price control and no one in government surely can come up with a better system in the months left for the next general elections. So the government’s only hope is that oil marketing companies somehow bear the burden; banks are being asked to increase credit to these companies. Maybe oil prices, and not the nuclear deal, should be the most crucial determinant of election timing. If crude keeps becoming expensive globally, the sooner the UPA can hand over the problem to the next government, the more relieved it will feel.
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