Just do it

There will be no politically convenient time for an oil price hike

Today, a Group of Ministers will debate whether oil companies should raise domestic petroleum prices. While Planning Commission Deputy Chairman Montek Singh Ahluwalia has indicated that petroleum product prices in India need to rise, there is no consensus on the issue. The last time a correction was made in prices of petro products was in February 2007. Since then the price of crude oil has risen by 40 per cent. Yet Indian domestic prices have remained unchanged. The main reason for not increasing this price has been the potential unpopularity of such a step with the middle classes. In fact, in terms of its impact on the consumer price index, the effect will be small and will fade out in 10 weeks.

Yet, the government has chosen not to make the necessary correction. If the assumption was that postponement of the correction would help the UPA to win state elections, clearly that strategy needs to be abandoned now. Till the end of its scheduled term, the UPA government will see one important state election after another. The calendar gives the Centre no electorally convenient moment.

Mounting losses of public sector oil enterprises are resulting in a rising off-budget subsidy in the form of oil bonds. But there is another powerful reason to raise oil prices in India. Today India and China account for the bulk of the growth in global oil demand. Over the last two years, 70 per cent of the additional demand for oil came from India and China. If domestic oil prices in India and China do not go up, it is unlikely that global demand for oil will reduce. And, if their demand for oil does not go down, there is no incentive for oil producers to lower prices. Over the last one year, the rupee price of the Indian basket of crude oil has increased from Rs 2,622 to Rs 5,537 per barrel. The government must increase domestic oil price accordingly. China recently raised domestic oil prices by 10 per cent; it is time for India to do the same. Raising domestic oil prices is also an important way is to discourage use of petro products for fuel. Currently the subsidy being provided by the government serves to increase the use of oil intensive electricity generators and transport. There is a need to rethink oil petroleum policy, keeping in mind that first principle economics tells us that keeping goods cheap increases their consumption.