That the Union finance ministry and petroleum ministry have different figures on under-recovery by oil marketing companies is a perfect demonstration of the absurdity of India?s oil economy?when no one wants to look at the big picture, small details become important. The government?s pricing regime is stunningly out of line. India?s import prices have gone up 100% since March 2005, but retail prices of petrol and diesel (taking Delhi prices) have been increased by only 20% and 12.5%, respectively. There have been five mild upward revisions and two downward revisions in oil retail prices. All indications are that there will be no immediate increase, in spite of analysts pointing out that the cost of imported oil for domestic consumption may go up by nearly 35% this calendar year. How long the oil bonds game can continue is not a question anyone in the government is prepared to answer. So, of course, the larger macroeconomic questions are even less likely to be considered. But they are crucial.
First, price fixing means less funds for exploration, and therefore less chance of decreasing the country?s import-dependency. Second, artificially low prices mean encouraging inefficient oil use. India?s oil intensity?the ratio of increase in total output and oil consumption?is almost three times that of OECD countries. There are grand official plans to bring oil intensity down from 1.1 (this means for every 1% growth in GDP, oil consumption grows by 1.1%) to 0.7 by 2025. But with prices fixed so ridiculously low, there?s little incentive for users to change their consumption behaviour. There are already worrying signs. Figures for the last two years show that oil products? consumption has grown on an average by more than 5.5%. This represents a significant increase from the trend in recent past?3% annual growth. Third, the retail price peg is making the country avoid a fiscal question. Taxes on oil products account for about 50% of their retail price (far above global norms) and there?s good reason to cut taxes. Taxmen will howl in protest because oil taxes are big contributors to the kitty. Fiscal management may become difficult, too. But with market pricing of oil, the options will become clear?do we try to adjust fiscal problems now to give better shape to the oil economy in the medium term?