It is almost impossible to find any merit in the government?s fuel pricing policy, even after the hike in petrol and diesel prices on Thursday. The policy as it stands forces oil marketing companies into losses, subsidises the upper middle classes, and encourages wasteful switching to diesel among other distortionary impacts. The petroleum minister began his second innings by hinting at a complete decontrol of fuel prices. The new Economic Survey suggests the same. The government must now decontrol as soon as possible. We have argued in these columns before that now is the perfect time to decontrol given the relatively benign global prices of crude oil, which are hovering at around $70 a barrel. OMCs break even at around the $60-$65 mark at current retail prices. So even after the hikes, OMCs will continue to make losses. Luxury cars powered by diesel engines will continue to eat into subsidies apparently targeted at farmers who use diesel gensets for irrigation and pumping. LPG, a considerable part of it used for commercial purpose, will also continue to be subsidised without any justification. The fuel policy therefore defies not just principles of market-based efficiency but also equity. The middle classes arguably gain a lot more on the whole from fuel subsidies than the poor do.
If at all there are concerns about equity after decontrol, they should be addressed using directly targeted subsidies. If the poor need kerosene, then directly transfer cash or coupons to them to buy it at market prices. The middle classes who consume LPG and whose private transport runs on petrol or diesel, should pay market prices for both. In fact, the over-production of fuel-inefficient and heavily polluting diesel car engines will slow down if prices are rationalised. Similarly, if farmers need subsidies to buy cheaper diesel, give them the cash to do it. Again, not all farmers deserve subsidy. At a more macro level, the fuel pricing policy distorts the consumption pattern of fuels in India?-we probably over consume because of artificial prices. Fortunately, oil is only a small part of our overall energy requirement. Unfortunately, even this small part has to be met nearly entirely by imports. Taken together, the policy prescription is obvious. The government must let fuel prices be set by the market. Delaying the decision to when oil prices rise further doesn?t make much sense.