Past experience may haunt the Centre while it is intending to reform the oil sector, particularly on the deregulation of subsidised petroleum products. It is also believed that the proposed reform in the pricing as well as delivery of the subsidy in the cooking fuels would be a tough task for the government to implement.
In order to fulfill its commitment, it is expected that the Union government may resort to partial deregulation of the auto fuel prices wherein the Oil Marketing Companies (OMCs) would be given leeway to fix the prices based on the stipulated band of crude oil prices, says an analysis done by Angel Broking. However, if the crude oil prices were to go above the band, the pricing freedom will be lost, it added.
Referring the previous unsuccessful experrience on dismantling of administered pricing mechanism (APM) in 2002 (which had to be later folded up in 2004 with the government?s intereference when the OMCs wanted to pass on the increasing crude prices to the consumers), it is not easy for the government to go ahead with the deregulation of transport fuels prices as well as delivery of cooking fuels subsidy at this point of time, the analysis pointed out.
The successful implementation of deregulation of subsidised products hinges on stability in crude prices, stable and lower product cracks of subsidised products, stable and reform-oriented government, under recoveries and subsidy sharing structure.
Stability in crude prices is a prime requirement for successful implementation of price deregulation. However, historical evidence and current news reports indicate price deregulation will be allowed with certain price bands. Thus in the current scenario of volatile crude and product prices, a successful continuation of any possible price deregualtion will not be easy, the analysis pointed out.
Similarly, on account of the ongoing global slowdown, the cracks of diesel and kerosene have declined substantially and are likely to remain under pressure on account of addition of significant refining capacity. If the cracks remain subdued it would result in lower refining profitability for the OMCs. Thus cracks prove to be a double-whammy as it hurts the marketing operations when they are high and boosts refining and when they are in low. It boosts profitability of marketing operations and dents the refining profitability, the analysis further said.
According to Deepak Pareek, an analyst with Angel Broking, another pre-requisite for successful implementation of the pricing reforms requires stable and reform-oriented government at the Centre. Though the pre-requisite seems to be in place, the government has partners such as TMC and DMK as its key allies. With both West Bengal and Tamil Nadu are expected to hold assembly elections in 2011, the government will find it tough to persuade these partners on pricing reforms. With elections to the other states likely to take place every year, a complete deregulation without the price band is unlikely.