Don’t control petrol prices: Free markets are an integral part of privatisation

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Updated: March 10, 2021 6:06 PM

Not allowing oil PSUs to hike petrol prices is not just a loss for them, it can derail the process of selling BPCL

The states can also lower the VAT they charge of around Rs 20 per litre, but the public narrative of high prices, like it or not, is focused around high central levies.The states can also lower the VAT they charge of around Rs 20 per litre, but the public narrative of high prices, like it or not, is focused around high central levies.

Given how governments have, historically, been used to telling PSUs what to do, it is very likely that there has been an informal suggestion that oil PSUs don’t raise prices of petrol and diesel in response to the higher global prices; prices have not been raised for over 10 days now. Customers are already feeling the pinch and the government would like to avoid prices reaching Rs 100 per liter in major urban centres, especially at a time when there are so many assembly elections coming up including the critical West Bengal. Normally, the government could reduce the massive customs and excise duties – it collects around Rs 33 per litre of excise duties and cesses on petrol – to lower customer prices, but given its huge deficit, it is understandably not keen to do that. The states can also lower the VAT they charge of around Rs 20 per litre, but the public narrative of high prices, like it or not, is focused around high central levies.

Apart from the obvious hit that oil PSUs like IOC, HPCL and BPCL will take if they are not allowed to regularly hike prices of petrol and diesel – especially if oil prices continue to rise – there is another reason why the government has to allow the oil PSUs to adjust local prices to account for what is happening in the domestic market. And that reason is the impending privatization of BPCL. If, for the sake of argument, there is a surge in oil prices after BPCL changes hands, it is obvious the government cannot ask it to absorb losses by not hiking retail prices. But if, at that point, the government asks IOC and HPCL to do this, the impact on BPCL’s fortunes will be the same. If, say, the price difference in retail prices is Rs 5 per litre, customers will stop buying from BPCL and will, instead, flock to the lower-priced IOC and HPCL.

Nor is this just a theoretical possibility. Several decades ago, when the government forced the oil PSUs to keep retail prices low, despite having committed to free them up, customers moved away from the new petrol pump outlets of Reliance and Essar. While the latter had entered into the retail business after the government had committed to ending/lowering subsidies, they started winding down this business and mothballed most of the petrol pumps they had set up.

Should the government ask IOC and HPCL to keep prices low, much the same fate will befall the newly-privatised BPCL. Indeed, given the recent refusal of PSU oil firms to adjust prices on a daily prices, any sensible buyer of BPCL will probably want a legally binding commitment from the government on it allowing free-market-pricing to prevail. Privatisation, to the unitiated, may look like just a process of ownership changing hands from the government to the private sector; in reality, it is about the government letting go of its irrational control on prices. Wanting to keep consumer prices in check is a perfectly legitimate desire, but the government has to do this by reducing its excise duties; it cannot expect the private sector to bear its burden.

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