The crisis in the euro zone has had at least one positive outcome for India. The fall in commodity prices, which has accompanied the crisis in Europe, will not only cool prices for consumers but also lower input costs for firms. Particularly important is the fall in the global price of crude oil from around $85 per barrel in early April to around $70 per barrel now. This is a most welcome development for oil marketing companies that can now cut their losses. It is also good news for the government?s fiscal bill?the government had earlier estimated oil prices to hover around $85 per barrel for the entire 2010-11 fiscal year. If oil prices remain in the range of $70 per barrel, then the under-recoveries of oil marketing companies are expected to be just under Rs 50,000 crore. On the other hand, a price level of around $85 would have created under-recoveries of Rs 1.1 lakh crore. The latter scenario could have neutralised the Rs 60,000-crore bonanza the government has reaped from the 3G auctions.
There are two ways in which the government can view the opportunity it has got from a cooling off in oil prices. The first is to be simply satisfied with the easing of the subsidy burden. The problem with that is an assumption that oil prices will hover around $70 and below for a prolonged period of time. Once things stabilise in Europe and as recovery picks up in the US, there will be an increased demand for oil, which will send prices upwards once again. So, the government must remember that this relief is, at best, temporary. The second way the government can react to the fall in crude oil prices is to use this moment as an opportunity to decontrol oil prices altogether. The best time to decontrol is when global prices are moderate so that there is no major spurt in retail prices. The government has already thrown away golden opportunities to decontrol?at one point in the global crisis, crude oil prices were hovering around $30 per barrel. Of course, we are unlikely to get back to that level anytime soon. In fact, $70 may be about as low as we are going to get in the near future. The government is only one year into its term in office and, therefore, politically this may be the best time for hard decisions. But will the government grab the opportunity?
