Plunging crude oil prices aren’t just a boon for
corporate India and the consumer. They are an invaluable opportunity for
the government to push for faster reform of pricing and distribution
distortions in the oil and gassectors. The Indian basket of crude oil is
trading below $43 a barrel, a seven-month low and less than half the
price of July last year. At the start of the current financial year, the
Union government had prepared its oil economy budget after assuming the
crude oil price to be at $70 a barrel. So far the average price has
been $55 a barrel – and, with global prices slated to slip to $40 a
barrel, the savings for the rest of the year would be substantial.
Moreover, by all accounts the convergence of global factors that has
kept prices benign is likely to continue.
The beneficial effects
of recent reforms to fuel pricing are already visible. In June 2010,
petrol prices were deregulated. This was followed by an exercise to
convert the cooking gas subsidy to a direct benefit transfer scheme that
went all-India in January this year. And in October 2014, the diesel
prices were deregulated. The impact on the petroleum subsidy has been
significant: the budgetary outlay has more than halved in 2014-15. For
the state-controlled oil marketing companies, the savings on
under-recoveries – the difference between production costs and retail
price – have been dramatic too. Underrecoveries dropped from Rs 1,39,869
crore in 2013-14 to Rs 72,314 crore in 2014-15. The government should
now focus on the need to eliminate the remaining subsidies on petroleum
products. To begin with, the subsidy on kerosene should be discontinued.
Retaining subsidy on kerosene distributed through ration shops is
dangerously illogical; having deregulated open-market kerosene prices in
February this year, the temptation for arbitrage is high. The subsidy
on cooking gas, mostly used by the better off, should also end.
Apart
from the monetary gains, the elimination of subsidies has corrected the
imbalance between diesel and petrol consumption in the transport
sector, as is evident in lower sales of gas-guzzling sports utility
vehicles; and reduced the incidence of kerosene adulteration of diesel.
These advantages strengthen the case for the government to take reforms
one step further to gas pricing and distribution. In a country that
imports a third of its gas requirements outside the administered pricing
system and urgently needs to reduce its excessive dependence on coal, a
transparent and fair gas pricing regime is essential. Without it,
big-ticket foreign investment will stay out, and a host of power and
fertiliser plants will stay stalled. Cleaning up gas pricing might well
have a positive domino effect on power and fertiliser subsidies, with
which successive governments have struggled to cope. For an economy that
urgently needs to address the twin challenges of accelerating
investment and climate change, it makes little sense to continue with an
administrative regime that is distortionary in its impact, especially
when global and local factors converge to present a unique opportunity
to reform.
(Source: Editorial in the Business Standard dated 26-08- 2015.)
