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Fuel price reforms: How likely? 
(Fri, 4 Jun Pre-Open) 
 
Hardly anyone would disagree that the Indian government needs to find ways to increase revenues and cut costs. Not all costs are under its control though. Take the case of oil. India needs to import close to 80% of its oil requirements. The price of crude oil swings to the dynamics of the global markets. And in the recent years, it has swung to very high levels. But the Indian government doesn't allow the oil companies to pass on the costs to the ultimate consumer. It reckons a large section of Indian citizens cannot afford the high cost of fuels. And raising fuel prices will be hugely unpopular politically.

Committee after expert committee has made recommendations that this cannot carry on forever. The oil companies simply cannot bear the enormous losses from this under pricing. And the government in turn cannot dole out subsidies to the oil companies. Nothing substantive has happened though. But the situation seems to be changing. At least, the recent spate of announcements seems to suggest that. In fact, the government is looking at the issue of under pricing across the Indian energy industry.

Recently, it revised the price of APM gas upwards. It refers to the gas produced from blocks that the government gave to ONGC and Oil India without holding auctions. As per a leading business daily, these companies will now be allowed to charge market rates (not merely the revised APM rates) for the gas produced from any new discovery in these fields.

Then there is the hike in petrol and diesel prices which seems to be imminent. An empowered group of ministers is set to meet on June 7 to make a decision. Earlier there were doubts whether they will be able to raise prices to the extent required. For example, petrol and diesel prices needed to be hiked by around Rs 6 per liter each to bring them at par with international rates. But with the softening of oil price due to the European debt crisis, the government needs to increase the price by a more palatable figure of Rs 3.5.

Good economics says that they should go ahead with the hike. Moreover, they should follow through by not interfering again if international crude oil prices were to start rising upwards in the future. In our view, that will be the hard part. It is one thing to introduce reforms when conditions are conducive, it is quite another to stick with them when it extracts a political price. We believe, over the long run crude oil prices will go in one direction - upwards . It remains to be seen if the political class will have the gumption to let market forces play out when that happens. We certainly have our doubts.

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3 Responses to "Fuel price reforms: How likely?"

Ashish

Jun 4, 2010

The subsidy issue is over hiped. First the govt charges absobent taxes (custom duty, excise duty, vat etc) which constitues the major chunk in the price of the fuel. Then it later reduces the price in name of subsidy.

You will be surprised to know the tax component in the price of 1ltr if fuel. Take a wild guess ????

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alok

Jun 4, 2010

Why LPG is sold at subsidized cost to about 10 crore rich and middle class families who also own 64 crore phones and 20 crore vehicles and 100 crore unsubsidized energy using equipments. Why there is LPG subsidy when solar cooking is free during sunny hours and induction electric cooker costs half in comparison to subsidized LPG in terms of money and time. When a Pakistani Nepalese or Bangladeshi with less per capita income is not getting any LPG subsidy what good works we have done in energy sector to get subsidized LPG. Why proportion of number of solar cookers and phunwa in India is 1:1000. Why we want to sell our country to crude exporting countries and bankrupt the economy when free and much cheaper Indian cooking fuels are available. Use of solar passive energy for cooking, water heating, food dehydration and processing, premises heating, lighting and scores of other purposes can make India a rich nation in one term of parliament.

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Shekhar

Jun 3, 2010

Govt can not completely stop subsidies on Diesel as it it used by public transport. But there is no point/ justification for govt subsidizing the diesel used by the luxury cars of rich people. Hence all private vehicles using diesel should reimburse the govt an amount that is equal to the subsidies on yearly basis. There could be a yearly tax (similar to Road Tax) that these vehicle owners have to pay based on their estimated consumption of Diesel. The lower the mileage higher the tax. This way govt ensures that the subsidies reach the deserving people not the Benz, Skoda & Hummer owners.

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