Tags:
Journalism of Courage
The government has correctly resisted popular calls for a cut in fuel prices in India as a consequence of the price of oil globally. The decline in the price of oil offers an opportunity for India to move to a path of market-determined oil prices and getting rid of the large number of distortions in both product and financial markets that our faulty policies are creating. With prices falling, the move to market prices will not be politically as unpopular as a move to make oil prices market-determined when prices are rising sharply as they have in recent months.
The last few months of high global prices have seen Indian oil companies run huge losses as the government kept administered oil prices low. Today, not only are there long queues at petrol pumps and widespread shortages of diesel and LPG, the oil policy has created a number of distortions in the economy. When global oil prices started rising, but domestic prices did not, oil companies started making losses. At first, these companies borrowed from banks but once they hit their limits they turned to the government whose policy was causing the problem. The government, if it had to, should have given a transparent on-budget subsidy. Instead, public sector oil companies were given loans. But worse, the loans were not regular government bonds. Oil companies were given oil bonds. In this distorted environment also bonds should have been sold in the market. The companies would have raised rupees and then bought dollars in the rupee-dollar market. However, a further distortion was layered on. These special oil bonds were not given the status of being SLR eligible, like other government bonds. So banks did not want them. This was done to keep regular government bonds more attractive, and thus keep their interest rate low.
