Fuelling the crisis

The petroleum minister must know that there is no alternative to hiking fuel prices

Written by The Financial Express | Published: September 3, 2013 2:24 am

The petroleum minister must know that there is no alternative to hiking fuel prices

Petroleum Minister M. Veerappa Moily has done well to disassociate himself from the proposal to keep petrol pumps open from 8am to 8pm,supposedly to help reduce fuel consumption. But Moily now needs to tell us what his solution is,and more importantly,when he plans to begin implementing it. Between January,when the government first outlined its plans to hike diesel prices — a fifth of consumption was to be linked to market prices immediately and a 45 paise monthly hike was planned for the rest — and now,under-recoveries are back to where they were. In the case of diesel,they fell from Rs 9.03 per litre in January to Rs 3.73 in May and were Rs 10.22 on August 15; from Rs 490.5 per LPG cylinder in January,under-recoveries fell to Rs 378.38 in May and then rose to Rs 412 on August 15. For the overall sector,subsidies fell from Rs 389 crore a day in January to Rs 252 crore in May and were back at Rs 389 crore on August 15.

In such a situation,the government has two choices. Either let go of the fiscal deficit and keep subsidising consumption,or kill off the oil companies and,along with it,usher in fuel rationing. The budget provides for Rs 178 crore of daily subsidies,and the balance Rs 211 crore has to be provided for by ONGC,Gail,IOC,HPCL and BPCL. So if the budget doesn’t provide more funds,these companies will run out of cash eventually and will start rationing fuel.

The more sensible solution,and this is what the Kirit Parikh report outlined three years ago,is to pick a date to freeze the subsidy and then hike prices regularly. Parikh took 2002 as the cut-off point,since that is when prices of kerosene were last raised,and pointed out that since per capita incomes had risen 60 per cent in real terms since,a 60 per cent hike in kerosene prices would leave consumers no worse off. It’s also worth keeping in mind that when prices of diesel were hiked in January 2013,consumption fell from 6.1million tonnes (MT) in December 2012 to 5.8 MT in January and to 5.4 MT in February. Later,the market took the price hike in its stride and consumption rose again. Worse,with diesel vastly subsidised,industry has started burning diesel in furnaces instead of lower quality furnace oils — monthly consumption of furnace oils has fallen from 7.8 lakh tonnes in 2011-12 to 6.4 lakh tonnes in 2012-13 to 5.2 lakh tonnes in the first few months of 2013-14. Given this reality,it is not clear what Moily is waiting for.

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