The Hindu Business Line : Half-measures still

The "integrated package" of duty reductions, oil bonds and change in pricing mechanism of petroleum products announced along with the increase in transportation fuel prices on Monday is disappointing, dangerous and appears designed with the single objective of limiting the immediate damage to the government's finances. Of the three stakeholders in the exercise — consumers, oil companies and the government — the government will sacrifice the least. Yes, it is set to incur a major liability of Rs 28,000 crore in the form of bonds that will be issued to the oil companies but the responsibility for their redemption will, in all probability, fall on the next government. The consumers will pay the most, directly for their consumption of petrol and diesel, and indirectly because of the cascading effect on prices of other commodities and services. The oil companies probably have reason to smile as their concerns have been addressed — they will get tradeable bonds that they can either sell or pledge to raise funds and neutralise their under-recoveries. The reduction in Customs duty on petrol and diesel from 10 per cent to 7.5 per cent will have a small impact on refining margins but that will be compensated by the consequent increase in marketing margins as the ex-refinery prices of the two products will drop correspondingly.

It is disappointing that the government has yet again shied away from reducing subsidies on cooking gas and kerosene. Reduction and restructuring of the subsidy mechanism on the two products was among the three major recommendations of the Rangarajan Committee; the government has acted on the other two, namely reduction in Customs duties on petrol and diesel and shifting to a trade-parity pricing mechanism, but has chosen to ignore the most important one. There is no reason why cooking gas, a fuel consumed largely by the thriving middle-class, ought to be subsidised. Again, the shift to a trade-parity pricing mechanism could mean cumbersome administration as the parity would change dynamically based on the imports and exports of petroleum products. Who is going to keep tabs on this, and how often will it be adjusted?

All this begs the question this newspaper has been raising at every opportunity: why not free the industry completely and leave it to market forces to determine fuel prices? Why should the government, which is not a direct player in the industry, determine them? Those doubting the efficacy of market forces have only to look at the telecom or the aviation industry, where tariffs have plummeted since the industries were freed and exposed to full-bodied competition. In any case, the government can protect weaker sections by giving them cash subventions instead of routing the subsidies through the oil companies (Rs 26,604 crore for kerosene and LPG in 2005-06). With cash, these people can buy the fuel of their choice, not that of the government.

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