In regard to the second, let us look at what the Centre did during 1998-99, which was first a full year after the parity principle was laid down in September 1997. Despite the international price of diesel keeping low for major part of year, prices to consumers was not reduced proportionately. This was also the position in respect of other products like naphtha, fuel oil, low sulphur high speed (LSHS) whose prices were also linked to respective international prices with effect from September 2, 1997. The government thus, generated a huge surplus about which there was not even a whisper.

It may be recalled that in August 1997, the government had issued oil bonds worth Rs 13,000 crore to oil companies to deal with existing deficit in the oil pool account (OPA). As against a redemption proposed over a period of 5-7 years in accordance with the initial plan, these bonds have been redeemed in less than two years (an outstanding of only Rs 385 crore remains). Needless to say, that money for this has been garnered by denying to hapless consumers the benefit of lower international prices until end of fiscal 1998-99.

In view of the above and having shown utter disregard to parity principle in the previous year, it is highly improper for the government to now cite the same principle when, international price was on the rise during current year.

As regards the current deficit in OPA estimated at Rs 5,200 crore, it should look at things in totality. If, you only add back Rs 12,615 crore appropriated from OPA for redemption of bonds, it would have a surplus of Rs 7,415 crore (Rs 12,615 minus Rs 5,200).

Even on the above basis, the government would have had no valid justification for increasing the price, it had resorted to financial engineering to avoid possible embarassment. It first took away surplus money from the OPA, relieved itself of the burden of bonds (much earlier than originally planned) and presented to the public a substantial deficit thereby preparing the ground for a steep hike in price.

A close look at the break-up of Rs 5,200 crore would expose many chinks in the functioning of the OPA. Apart from outstanding bonds of Rs 385 crore, it includes Rs 900 crore towards interest on bonds, Rs 2,100 crore due to cost updation of oil companies and Rs 1,000 crore towards miscellaneous items etc. From this, it would appear that almost muster under the pool Account.

The dubious claims about deficit in OPA would also be clear from what happened during 1996-97. Prior to July 1996, the price hike (this included increase in diesel price by 15 per cent), the government had estimated a deficit at the year-end to be Rs 11,400 crore. Following the hike, it said, that this would be reduced to Rs 4,000 crore. Against this, the actual figure the end of the year turned out to be a whopping Rs 15,500 crore. No credible explanation was made available for this huge gap of Rs 11,500 crore!

In view of widespread use of diesel viz, transport, power etc, an increase in its price triggers of rampant inflation. Very often, users raise charges for their services much more than the proportionate impact of hike in price. For instance, transport operators have decided to increase freight by about 30-40 per cent. The consumers thus, land up paying much more than what the government had intended.

The people have voted this government on the promise of delivering good governance. Amongst others, this would require that the cost of living is kept under check. The steep hike in diesel price defeats this objective. Even as it is getting ready for another onslaught (reportedly next month), there is an urgent need for serious introspection.

The government should not only refrain from further increase, but also, withdraw at least half of the hike already effected. In this context, it may be recalled that in July 1996 initially, price of diesel was jacked up by 30 per cent. In a couple of days, this was reduced to 15 per cent. There is no harm in applying a correction, if, initial decision by itself is based on distortion of underlying facts/principles.

The author is chief economist, Fertiliser Association of India